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# FIN 535 Final Exam

FIN 535 Week 11 Final Exam – Strayer

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Chapters 8 Through 21

Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates

1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
a. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
b. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
c. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
d. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.

2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
a. a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

3. The international Fisher effect (IFE) suggests that:
a. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

5. Because there are sometimes no substitutes for traded goods, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

6. According to the IFE, if British interest rates exceed U.S. interest rates:
a. the British pound’s value will remain constant.
b. the British pound will depreciate against the dollar.
c. the British inflation rate will decrease.
d. the forward rate of the British pound will contain a premium.
e. today’s forward rate of the British pound will equal today’s spot rate.

7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:
a. the nominal interest rates of both countries are the same.
b. the inflation rates of both countries are the same.
c. the exchange rates of both countries will move in a similar direction against other currencies.
d. none of the above

8. Given a home country and a foreign country, purchasing power parity suggests that:
a. the inflation rates of both countries will be the same.
b. the nominal interest rates of both countries will be the same.
c. A and B
d. none of the above

9. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. the value of the euro would often appreciate against the dollar.
b. the value of the euro would often depreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

10. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
b. some corporations with excess cash could have generated profits on average from covered interest arbitrage.
c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.

11. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:
a. the income differential.
b. the forward discount or premium.
c. the inflation differential.
d. none of the above

12. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
a. 2%.
b. 3%.
c. −2%.
d. 5%.
e. 8%.

13. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
a. follows their exchange rate movement.
b. is due to their inflation differentials.
c. is zero.
d. is constant over time.
e. C and D

14. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.
a. 2 percentage points above; depreciate by about 2%
b. 3 percentage points above; depreciate by about 3%
c. 3 percentage points below; appreciate by about 3%
d. 3 percentage points below; depreciate by about 3%
e. 2 percentage points below; appreciate by about 2%

15. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.
a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%

16. Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
a. lower U.S. inflation; depreciate
b. lower U.S. inflation; appreciate
c. higher U.S. inflation; depreciate
d. higher U.S. inflation; appreciate

17. According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.
a. lower; strengthen
b. lower; weaken
c. higher; weaken
d. higher; strengthen

18. If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.
a. greater than
b. less than
c. equal to
d. answer is dependent on whether the forward rate has a discount or premium

19. The Fisher effect is used to determine the:
a. real inflation rate.
b. real interest rate.
c. real spot rate.
d. real forward rate.

20. Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:
a. interest rate parity.
b. locational arbitrage.
d. the exchange rate mechanism.

21. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.
a. appreciate; 4.85
b. depreciate; 3,11
c. appreciate; 3.11
d. depreciate; 4.85

22. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is \$0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:
a. \$0.0076.
b. \$0.0073.
c. \$0.0070.
d. \$0.0066.

23. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; appreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

24. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 2. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

25. Which of the following is indicated by research regarding purchasing power parity (PPP)?
a. PPP clearly holds in the short run.
b. Deviations from PPP are reduced in the long run.
c. PPP clearly holds in the long run.
d. There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

26. The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is \$1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:
a. \$1.47.
b. \$1.53.
c. \$1.43.
d. \$1.57.

27. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____ by about ____%, according to the international Fisher effect (IFE).
a. depreciate; 2.9
b. appreciate; 2.9
c. depreciate; 1.0
d. appreciate; 1.0
e. none of the above

28. There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect.
a. True
b. False

29. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

30. The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
a. True
b. False

31. According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

32. Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.
a. True
b. False

33. The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.
a. True
b. False

34. If the IFE theory holds, that means that covered interest arbitrage is not feasible.
a. True
b. False

35. If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.
a. True
b. False

36. Interest rate parity can only hold if purchasing power parity holds.
a. True
b. False

37. If interest rate parity holds, then the international Fisher effect must hold.
a. True
b. False

38. Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

39. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

40. Which of the following theories can be assessed using data that exists at one specific point in time?
b. international Fisher effect (IFE).
c. A and B
d. interest rate parity (IRP).

41. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
a. absolute form of PPP.
b. relative form of PPP.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

42. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 1. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

43. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

44. Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound’s spot exchange rate should ____ by about ____ over the year.
a. depreciate; 1.9%
b. appreciate; 1.9%
c. depreciate; 3.94%
d. appreciate; 3.94%

45. According to the international Fisher effect (IFE):
a. the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
b. the exchange rate adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
c. the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
d. the percentage change in the foreign spot exchange rate will be negative if foreign interest rate is lower than the local interest rate.

46. Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have \$100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro’s spot exchange rate is \$1.40. What will be the yield on your investment if you invest in euros?
a. 8%
b. 5%
c. 3%
d. 2.78%

47. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have \$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is \$0.689. What will be the yield on your investment if you invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%

48. Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?
a. real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
b. real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
c. real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
d. IFE doesn’t hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.

49. The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.
a. True
b. False

50. If purchasing power parity holds, then the Fisher effect must also hold.
a. True
b. False

51. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets.
a. True
b. False

52. Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one-year put option for \$.03 per unit on Australian dollars at a strike price of \$0.72. Today the Australian dollar is quoted at \$0.70. You believe that purchasing power parity holds. You should accept the offer.
a. True
b. False

53. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.
a. 3.43%
b. 5.68%
c. 6.5%
d. 7.3%

54. Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.
a. True
b. False

55. According to the international fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

56. According to purchasing power parity (PPP), if a foreign country’s inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.
a. True
b. False

57. According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.
a. True
b. False

58. The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is \$0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be
a. \$0.0078.
b. \$0.0082.
c. \$0.0111.
d. \$0.00492.
e. None of the above

59. Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; depreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

60. The following regression was conducted for the exchange rate of the Cyprus pound (CYP):

Regression results indicate that a0 = 0 and a1 = 2. Therefore,
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the Cyprus pound in the future.

61. Among the reasons that purchasing power parity (PPP) does not consistently occur are:
a. exchange rates are affected by interest rate differentials.
b. exchange rates are affected by national income differentials and government controls.
c. supply and demand may not adjust if no substitutable goods are available.
d. all of the above are reasons that PPP does not consistently occur.

62. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

Chapter 9—Forecasting Exchange Rates

1. Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

2. Which of the following forecasting techniques would best represent sole use of today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

3. Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

4. Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro’s future currency value?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

5. If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
a. underestimated the future exchange rates over time.
b. overestimated the future exchange rates over time.
c. forecasted future exchange rates accurately.
d. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

6. According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:
a. currencies exhibited about the same mean forecast errors as a percent of the realized value.
b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies.
c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

7. Assume the following information:

Predicted Value of Realized Value of
Period New Zealand Dollar New Zealand Dollar
1 \$.52 \$.50
2 .54 .60
3 .44 .40
4 .51 .50

Given this information, the mean absolute forecast error as a percentage of the realized value is about:
a. 1.5%.
b. 26%.
c. 6%.
d. 6.5%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

8. If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.
a. technical forecast technique
b. fundamental forecast technique
c. all of the above
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

9. Which of the following is true?
a. Forecast errors cannot be negative.
b. Forecast errors are negative when the forecasted rate exceeds the realized rate.
c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

10. Which of the following is true according to the text?
a. Forecasts in recent years have been very accurate.
b. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
c. Forecasting errors are smaller when focused on longer term periods.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

11. A fundamental forecast that uses multiple values of the influential factors is an example of:
a. sensitivity analysis.
b. discriminant analysis.
c. technical analysis.
d. factor analysis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

12. When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):
a. lagged input.
b. instantaneous input.
c. simultaneous input.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

13. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

14. Which of the following is not a limitation of fundamental forecasting?
a. uncertain timing of impact.
b. forecasts are needed for factors that have a lagged impact.
c. omission of other relevant factors from the model.
d. possible change in sensitivity of the forecasted variable to each factor over time.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

15. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today’s spot rate of the Mexican peso is \$.20. What is the approximate five-year forecast of the peso’s spot rate if the five-year forward rate is used as a forecast?
a. \$.131.
b. \$.226.
c. \$.262.
d. \$.140.
e. \$.174.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

16. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today’s spot rate of the Canadian dollar is \$.80. The spot rate forecasted for one year ahead is:
a. \$.860.
b. \$.848.
c. \$.740.
d. \$.752.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

17. If today’s exchange rate reflects all relevant public information about the euro’s exchange rate, but not all relevant private information, then ____ would be refuted.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

18. According to the text, research generally supports ____ in foreign exchange markets.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

19. Assume that the U.S. interest rate is 11 percent, while Australia’s one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
a. depreciation in the Australian dollar’s value over the next year.
b. appreciation in the Australian dollar’s value over the next year.
c. no change in the Australian dollar’s value over the next year.
d. information on future interest rates is needed to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

20. If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:
a. covered interest arbitrage is feasible.
b. the international Fisher effect (IFE) is supported.
c. the international Fisher effect (IFE) is refuted.
d. the average absolute error from forecasting would equal zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

21. Which of the following is not a forecasting technique mentioned in your text?
a. accounting-based forecasting.
b. technical forecasting.
c. fundamental forecasting.
d. market-based forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

22. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is:
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

23. The following regression model was estimated to forecast the value of the Indian rupee (INR):

INRt = a0 + a1INTt + a2INFt − 1 + t,

where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = −.5; and a2 = .8. Assume that INFt − 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
30% −2%
40% −3%
30% −4%

The expected change in the Indian rupee in period t is:
a. 3.40%.
b. 0.40%.
c. 3.10%.
d. 1.70%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

24. Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A\$). Listed below are the forecasted and realized values for the last period:

Currency Forecasted Value Realized Value
Australian dollar \$.60 \$.55
Japanese yen \$.0067 \$.0069

According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.
a. more accurate than
b. less accurate than
c. more biased than
d. the same as

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

25. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the pound in year t and Ft − 1 is the forward rate of the pound in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

26. Which of the following is not a method of forecasting exchange rate volatility?
a. using the absolute forecast error as a percentage of the realized value.
b. using the volatility of historical exchange rate movements as a forecast for the future.
c. using a time series of volatility patterns in previous periods.
d. deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

27. If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.
a. weaken; delay
b. weaken; expedite
c. appreciate; expedite
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

28. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.
a. appreciate; depreciate
b. appreciate; appreciate
c. depreciate; depreciate
d. depreciate; appreciate

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

29. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.
a. depreciate by .8%; today
b. depreciate by .8%; tomorrow
c. appreciate by .8%; today
d. appreciate by .8%; tomorrow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

30. Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

31. Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:

eurot = b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1

The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.
a. appreciation; 3.4
b. depreciation; 3.4
c. appreciation; 0.7
d. appreciation; 1.2

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

32. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is \$1.03. Using purchasing power parity, the expected spot rate at the end of one year is \$____.
a. 1.02
b. 1.03
c. 1.04
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

33. If the one-year forward rate for the euro is \$1.07, while the current spot rate is \$1.05, the expected percentage change in the euro is ____%.
a. 1.90
b. 2.00
c. −1.87
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

34. If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.
a. spot; high
b. spot; low
c. forward; high
d. forward; low

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

35. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and spot rate will provide ____ forecasts.
a. substantial; similar
b. substantial; very different
c. close to zero; similar
d. close to zero; very different

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

36. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.
a. technical
b. fundamental
c. market-based
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

37. Silicon Co. has forecasted the Canadian dollar for the most recent period to be \$0.73. The realized value of the Canadian dollar in the most recent period was \$0.80. Thus, the absolute forecast error as a percentage of the realized value was ____%.
a. 9.6
b. −9.6
c. 8.8
d. −8.8

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

38. The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.
a. lower; volatile
b. higher; stable
c. lower; stable
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

39. If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

40. Foreign exchange markets are generally found to be at least ____ efficient.
a. weak-form
b. semistrong-form
c. strong form
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

41. MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

42. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

43. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

44. A regression analysis of the Australian dollar value on the inflation differential between the U.S. and Australia produced a coefficient of .8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by .8%.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

45. The most sophisticated forecasting techniques provide consistently accurate forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

46. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

47. Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

48. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

49. The closer graphical points are to the perfect forecast line, the better is the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

50. Foreign exchange markets appear to be strong-form efficient.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

51. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

52. Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate’s implied standard deviation from the currency option pricing model.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

53. Market-based forecasting involves the use of historical exchange rate data to predict future values.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

54. Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

55. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

56. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

57. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

58. If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today’s exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

59. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

60. The potential forecast error is larger for currencies that are more volatile.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

61. A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

62. In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

63. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.
a. higher; to hedge
b. lower; not to hedge
c. higher; not to hedge
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

64. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

65. The following is not a limitation of technical forecasting:
a. It’s not suitable for long-term forecasts of exchange rates.
b. It doesn’t provide point estimates or a range of possible future values.
c. It cannot be applied to currencies that exhibit random movements.
d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

66. The following regression model was estimated to forecast the percentage change in the Australian Dollar (AUD):

AUDt = a0 + a1INTt + a2INFt − 1 + t,

where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = −.8; and a2 = .5. Assume that INFt − 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
20% −3%
80% −4%

There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.
a. 4.5%; 6.1%;
b. 6.1%; 4.5%
c. 4.5%; 5.3%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

67. Purchasing power parity is used in:
a. technical forecasting.
b. fundamental forecasting.
c. market-based accounting.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

68. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.
b. higher; sell; downward
c. higher; sell; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

69. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.
a. lower; sell; upward
b. lower; sell; downward
c. higher; sell; upward
d. higher; sell; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

70. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
a. appreciation of yen’s value over the next year.
b. depreciation of yen’s value over the next year.
c. no change in yen’s value over the next year.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

71. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
a. appreciation of pound’s value over the next year.
b. depreciation of pound’s value over the next year.
c. no change in pound’s value over the next year.
d. not enough information to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

72. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

73. If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:
a. weak-form efficient.
b. semistrong-form efficient.
c. strong-form efficient.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

74. Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the yen in year t and Ft − 1 is the forward rate of the yen in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

75. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is \$.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
a. \$.840
b. \$.890
c. \$.856
d. \$.854

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

76. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?
a. to decide in which foreign market to invest the excess cash.
b. to decide where to borrow at the lowest cost.
c. to determine whether to require the subsidiary to remit the funds or invest them locally.
d. to speculate on the exchange rate movements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

77. Sensitivity analysis allows for all of the following except:
a. accountability for uncertainty.
b. focus on a single point estimate of future exchange rates.
c. development of a range of possible future values.
d. consideration of alternative scenarios.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

78. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

79. A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the U.S. and Canada was −0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
a. increases; increases
b. decreases; increases
c. increases; decreases
d. increases; decreases

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

80. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

81. Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

82. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

83. Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

84. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

85. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and spot rate will provide similar forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

86. Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

87. Forecast errors tend to be large for short forecast horizons.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

88. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

89. Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of \$0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:
a. \$0.023.
b. \$0.021.
c. \$0.020.
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

90. Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.
a. appreciate; 16.22
b. depreciate; 16.22
c. appreciate; 6.66
d. depreciate; 6.66
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

91. The one-year forward rate of the British pound is \$1.55, while the current spot rate is \$1.60. Based on the forward rate, what is the expected percentage change in the British pound over the next year?
a. +5.0%
b. −3.1%
c. +3.1%
d. +3.2%
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

92. Which of the following is not a method of forecasting exchange rate volatility?
a. Using the absolute forecast error as a percentage of the realized value to improve your forecast.
b. Using the volatility of historical exchange rate movements as a forecast for the future.
c. Using a time series of volatility patterns in previous periods.
d. Deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1. Translation exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

2. Transaction exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

3. Economic exposure refers to:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.
e. the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
a. Diz Co.
b. Yanta Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co.
b. Kriner Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

6. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

7. Which of the following operations benefits from appreciation of the firm’s local currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
b. receiving earnings dividends from foreign subsidiaries.
c. purchasing supplies locally rather than overseas.
d. exporting to foreign countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

8. Which of the following operations benefit(s) from depreciation of the firm’s local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

9. Economic exposure can affect:
a. MNCs only.
b. purely domestic firms only.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

10. Under FASB 52:
a. translation gains and losses are included in the reported net income.
b. translation gains and losses are included in stockholder’s equity.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

11. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of \$1 million cash outflows in francs and the equivalent of \$1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.
a. strong dollar; favorably
b. weak dollar; not
c. strong dollar; not
d. weak dollar; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

12. A U.S. MNC has the equivalent of \$1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.
a. weak; somewhat stable
b. weak; favorably affected
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

13. Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about \$.40 while the present exchange rate of the DK is \$.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. not; stronger
c. favorably; weaker
d. not; weaker
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

15. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.
a. favorably; favorably affected but by a smaller degree
b. favorably; favorably affected by a higher degree
c. unfavorably; favorably affected
d. favorably; unfavorably affected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm’s local currency should:
a. increase local sales as it reduces foreign competition in local markets.
b. increase the firm’s exports denominated in the local currency.
c. increase the returns earned on the firm’s foreign bank deposits.
d. increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm’s local currency should:
a. decrease local sales as foreign competition in local markets is reduced.
b. decrease the firm’s exports denominated in the local currency.
c. decrease the returns earned on the firm’s foreign bank deposits.
d. decrease the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

18. If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against the dollar on ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPt) and the percentage change in the peso’s value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod.
a. negative; positive
b. positive; positive
c. positive; negative
d. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Analysis

20. A set of currency cash inflows is more volatile if the correlations are low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

21. Which of the following is not a form of exposure to exchange rate fluctuations?
a. transaction exposure.
b. credit exposure.
c. economic exposure.
d. translation exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

22. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A\$1,000,000, while Subsidiary B has net outflows in Australian dollars of A\$1,500,000. The expected exchange rate of the Australian dollar is \$.55. What is the net inflow or outflow as measured in U.S. dollars?
a. \$500,000 outflow.
b. \$500,000 inflow.
c. \$275,000 inflow.
d. \$275,000 outflow.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

23. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is \$1.05.
a. \$3,675,000 outflow
b. \$525,000 outflow
c. \$525,000 inflow
d. \$210,000 outflow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

24. One argument for exchange rate irrelevance is that:
a. MNCs can hedge exchange rate exposure much more effectively than individual investors.
b. investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
c. purchasing power parity does not hold very well.
d. MNCs are typically not diversified across numerous countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

25. ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
a. Transaction
b. Economic
c. Translation
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

26. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC’s transaction exposure is relatively ____.
a. negatively; high
b. negatively; low
c. positively; low
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

27. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs’ transaction exposure is ____ if the two currencies are ____ correlated.
a. high; positively
b. low; negatively
c. high; negatively
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).

28. Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?
a. −0.5%
b. −2.2%
c. −1.5%
d. −1.2%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

29. Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is \$1.01.
a. −\$75,750.
b. −\$60,600.
c. −\$111,100.
d. −\$25,250.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:
a. the expected percentage change in the currency for the next day.
b. the standard deviation of the daily percentage changes in the currency over a previous period.
c. the current level of interest rates.
d. the confidence level used.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today’s spot rates, the dollar value of the funds to be received is estimated at \$500,000 for the euros and \$300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

31. Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%.
b. 5.44%.
c. 17.98%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

32. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
a. −9.00%.
b. −30.00%.
c. −5.00%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

33. Appreciation in a firm’s local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
a. reduction; reduction
b. increase; increase
c. increase; reduction
d. reduction; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

34. In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.
a. be hurt by; appreciated
b. benefit from; depreciated
c. be hurt by; depreciated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

35. The ____ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ____ the percentage of a given financial statement item that is susceptible to translation exposure.
a. greater; smaller
b. smaller; greater
c. greater; greater
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

36. Under FASB 52, consolidated earnings are sensitive to the functional currency’s weighted average exchange rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

37. If the U.S. dollar appreciates, an MNC’s:
a. U.S. sales will probably decrease.
b. exports denominated in U.S. dollars will probably increase.
c. interest owed on foreign funds borrowed will probably increase.
d. exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

38. Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of 2. This indicates that:
a. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by 2%.
b. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by .2%.
c. if the foreign currency depreciates by 1%, Mill’s cash flows will increase by 2%.
d. if the foreign currency depreciates by 1%, Mill’s cash flows will decline by 2%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

39. ____ is (are) not a determinant of translation exposure.
a. The MNC’s degree of foreign involvement
b. The locations of foreign subsidiaries
c. The local (domestic) earnings of the MNC
d. The accounting methods used

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

40. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Regression Coefficient (a1) Regression Coefficient (a1)
Currency Earlier Subperiod Recent Subperiod
Australian dollar (A\$) −.80 .10
Sudanese dinar (SDD) .20 .25

Based on these results, which of the following statements is probably not true?
a. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
b. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
e. All of the above are true.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

41. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 5.13%.
b. 2.63%.
c. 4.33%.
d. 5.55%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

42. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC’s funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 17.28%.
b. 13.15%.
c. 14.50%.
d. 12.04%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

43. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

44. Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

45. A firm’s transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

46. Two highly negatively correlated currencies move in tandem almost as if they are the same currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

47. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

48. The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

49. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

50. If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

51. An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

52. Assume a regression model in which the dependent variable is the firm’s stock price percentage change, and the independent variable is percentage change in the foreign currency. The coefficient is negative. This implies that the company’s stock price increases if the foreign currency appreciates.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

53. A company may become more exposed or sensitive to an individual currency’s movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

54. Regression analysis cannot be used to assess the sensitivity of a company’s performance to economic conditions because economic conditions are unpredictable.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

55. A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

56. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

57. The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations is known as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

58. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

59. A reduction in hedging will probably reduce transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

60. The VAR method presumes that the distribution of exchange rate movements is normal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

61. The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

62. If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

63. Some MNCs are subject to economic exposure without being subject to transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

64. If positions in a specific currency among an MNC’s subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC’s overall exposure.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

66. Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.
a. increase; decrease
b. decrease; increase
c. increase; stay the same
d. stay the same; stay the same

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

67. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is \$.012 while the present exchange rate of the British pound is \$1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:
a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
c. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.
d. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

68. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. favorably; weaker
c. not; stronger
d. not; weaker

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

69. If a U.S. firm’s cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

70. If a U.S. firm’s sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; interest expenses
d. negative; gross profit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

71. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:
a. economic exposure.
b. translation exposure.
c. transaction exposure.
d. no exposure to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

72. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except:
a. the interest rate in the country of the subsidiary.
b. proportion of business conducted by the subsidiary.
c. its accounting method.
d. the exchange rate movements of the subsidiary’s currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

73. Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is −2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is \$1.23.
a. −\$38,468
b. −\$21,371
c. −\$17,097
d. −\$4,274

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

74. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is \$1.35.
a. −\$4,303
b. −\$7,830
c. −\$5,873
d. −\$1,958

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

75. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:
a. transaction exposure.
b. economic exposure.
c. translation exposure.
d. all of the above.

PTS: 1 DIF: Moderate
KEY: Bloom’s: Application

76. Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary’s revenue will ____, and its expenses will ____.
a. increase; decrease
b. decrease; remain unchanged
c. decrease; increase
d. increase; remain unchanged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

77. Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen’s depreciation.
a. decrease
b. increase
c. remain unchanged
d. A and C are possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

78. If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

79. A purely domestic firm is never exposed to exchange rate fluctuations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

80. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

81. Currency correlations are generally negative.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

82. Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

83. The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

84. The degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

85. Purely domestic firms are never affected by economic exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

86. Translation exposure affects an MNC’s cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

87. Since earnings can affect stock prices, many MNCs are concerned about translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

88. Which of the following is not true regarding currency correlations?
a. Two highly positively correlated currencies act almost as if they are the same currency.
b. If two inflow currencies are highly positively correlated transaction exposure is somewhat offset.
c. If two inflow currencies are negatively correlated transaction exposure is somewhat offset.
d. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

89. If the U.S. dollar appreciates,
a. an MNC’s U.S. sales will probably decrease.
b. an MNC’s exports denominated in U.S. dollars will probably increase.
c. an MNC’s interest owed on foreign funds borrowed will probably increase.
d. an MNC’s exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

90. Which of the following is not true regarding economic exposure?
a. Even purely domestic firms can be affected by economic exposure.
b. In general, depreciation of the firm’s local currency causes a decrease in both cash inflows and outflows.
c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.
d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

Chapter 11—Managing Transaction Exposure

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

3. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = \$.40
Swiss franc spot rate = \$.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?
a. \$234,000.
b. \$238,584.
c. \$240,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

4. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = \$.40
New Zealand dollar spot rate = \$.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ\$ and expects to receive NZ\$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
a. \$238,584.
b. \$240,000.
c. \$234,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

5. An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
b. use the forward market to sell forward whatever currencies you will receive.
c. use the forward market to buy forward whatever currencies you will receive.
d. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. sell a currency call option in British pounds.
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

8. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:
a. a money market hedge.
c. a forward purchase of euros.
e. selling euro call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

9. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:
a. a money market hedge.
b. a forward sale of yen.
e. selling yen put options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

10. The real cost of hedging payables with a forward contract equals:
a. the nominal cost of hedging minus the nominal cost of not hedging.
b. the nominal cost of not hedging minus the nominal cost of hedging.
c. the nominal cost of hedging divided by the nominal cost of not hedging.
d. the nominal cost of not hedging divided by the nominal cost of hedging.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

11. From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.
a. negative; positive
b. zero; positive
c. zero; zero
d. positive; negative
e. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

12. Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is \$2.02, the 180-day forward rate is \$2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.
a. \$391,210.
b. \$396,190.
c. \$388,210.
d. \$384,761.
e. none of the above

13. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
a. can; can
b. can; cannot
c. cannot; can
d. cannot; cannot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

15. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = \$.61
Spot rate = \$.60
Expected spot rate in 30 days = \$.56
30-day forward rate = \$.62

a. \$630,000.
b. \$610,000.
c. \$600,000.
d. \$590,000.
e. \$580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

16. A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.
a. long-term forward contract
b. currency option contract
c. parallel loan
d. money market hedge

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

17. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.
a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. A and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

Assume the forward rate of the Swiss franc is \$.50 and the spot rate of the Swiss franc is \$.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days.
a. \$101,904
b. \$101,923
c. \$98,769
d. \$96,914
e. \$92,307

19. The forward rate of the Swiss franc is \$.50. The spot rate of the Swiss franc is \$.48. The following interest rates exist:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:
a. \$101,904.
b. \$101,923.
c. \$98,770.
d. \$96,914.
e. \$92,307.

20. Your company will receive C\$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is \$.80. If you use a forward hedge, you will:
b. receive \$750,000 in 90 days.
c. pay \$750,000 in 90 days.
e. receive \$480,000 in 90 days.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

21. A call option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.03 per unit. A put option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be \$1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
a. \$1,169,000.
b. \$1,099,000.
c. \$1,106,000.
d. \$1,143,100.
e. \$1,134,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

22. Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of \$1.68, a 90-day expiration date, and a premium of \$.04. A put option exists on British pounds, with an exercise price of \$1.69, a 90-day expiration date, and a premium of \$.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be \$1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.
a. \$360,000.
b. \$338,000.
c. \$332,000.
d. \$336,000.
e. \$344,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

23. Assume that Kramer Co. will receive SF800,000 in 90 days. Today’s spot rate of the Swiss franc is \$.62, and the 90-day forward rate is \$.635. Kramer has developed the following probability distribution for the spot rate in 90 days:

Possible Spot Rate
in 90 Days Probability
\$.61 10%
\$.63 20%
\$.64 40%
\$.65 30%

The probability that the forward hedge will result in more dollars received than not hedging is:
a. 10%.
b. 20%.
c. 30%.
d. 50%.
e. 70%.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

24. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S\$) in 180 days. Today’s spot rate of the S\$ is \$.50, and the 180-day forward rate is \$.53. A call option on S\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on S\$ exists, with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.53 60%
\$.55 30%

The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
a. 0%
b. 10%
c. 30%
d. 40%
e. 70%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ\$) in 180 days. Today’s spot rate of the NZ\$ is \$.50, and the 180-day forward rate is \$.51. A call option on NZ\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on NZ\$ exists with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.49 60%
\$.55 30%

The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

26. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a. index
b. futures
c. forward
d. money market
e. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

27. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is \$.23. Furthermore, Money’s financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are \$.20 and \$.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____.
a. \$0.
b. −\$7,500.
c. \$7,500.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

28. Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the next quarter, Hanson has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is \$1.50. Furthermore, Hanson’s financial center has indicated that the possible values of the British pound at the end of next quarter are \$1.57 and \$1.59, with probabilities of .50 and .50, respectively. Based on this information, what is the expected real cost of hedging payables?
a. \$80,000.
b. −\$80,000.
c. \$1,570,000.
d. \$1,580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

Exhibit 11-1

U.S. Jordan
360-day borrowing rate 6% 5%
360-day deposit rate 5% 4%

29. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?
a. \$377,115.
b. \$373,558.
c. \$363,019.
d. \$370,000.

30. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.46. What is Pablo’s cost from implementing a money market hedge (assume Pablo does not have any excess cash)?
a. \$224,135.
b. \$226,269.
c. \$224,114.
d. \$223,212.

31. Lorre Company needs 200,000 Canadian dollars (C\$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:

Possible Value of
Canadian Dollar in 90 Days Probability
\$0.54 15%
0.57 25%
0.58 35%
0.59 25%

The 90-day forward rate of the Canadian dollar is \$.575, and the expected spot rate of the Canadian dollar in 90 days is \$.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?
a. 40%.
b. 60%.
c. 15%.
d. 85%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

32. Quasik Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount received from the currency option hedge?
a. \$219,000.
b. \$222,000.
c. \$216,000.
d. \$213,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

33. FAB Corporation will need 200,000 Canadian dollars (C\$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
a. \$144,000.
b. \$148,000.
c. \$152,000.
d. \$150,000.

SOLUTION: (\$.71 + \$.01)  200,000 = \$144,000. Note: the call option is not exercised since the spot rate is less than the exercise price.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

34. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A\$) 180 days from now. Put options are available for a premium of \$.02 per unit and an exercise price of \$.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:

Future Spot Rate Probability
\$.46 20%
\$.48 30%
\$.52 50%

The 90-day forward rate of the Australian dollar is \$.50.

What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a. 0%.
b. 80%.
c. 50%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

35. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
a. put option
b. forward
c. call option
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

36. Which of the following is the least effective way of hedging exposure in the long run?
a. long-term forward contract.
b. currency swap.
c. parallel loan.
d. money market hedge.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

37. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.
b. lagging
c. cross-hedging
d. currency diversification
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

38. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries and it may not be necessary to hedge the position of each individual subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

39. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a. receivable; purchase
b. payable; sell
c. payable; purchase
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

40. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.
a. forward; small
b. futures; large
c. forward; large
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

41. Celine Co. will need €500,000 in 90 days to pay for German imports. Today’s 90-day forward rate of the euro is \$1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be \$1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be \$1.09. Based on this information, the expected value of the real cost of hedging payables is \$____.
a. −35,000
b. 25,000
c. −1,000
d. 1,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

42. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
a. highly positive.
b. highly negative.
c. zero.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

43. If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency as a dollar amount for comparison purposes.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

44. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?
a. \$952,381.
b. \$995,851.
c. \$943,396.
d. \$995,025.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

45. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
a. \$1,000,000.
b. \$1,055,602.
c. \$1,000,830.
d. \$1,045,644.

46. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

47. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

48. To hedge a contingent exposure, in which an MNC’s exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.
a. money market
b. futures
c. forward
d. options

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

49. A ____ is not normally used for hedging long-term transaction exposure.
a. long-term forward contact
b. futures contract
c. currency swap
d. parallel loan

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

50. The ____ does not represent an obligation.
a. long-term forward contract
b. currency swap
c. parallel loan
d. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

51. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

52. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

53. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

54. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

55. MNCs generally do not need to hedge because shareholders can hedge their own risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

56. Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

58. When the real cost of hedging is positive, this implies that hedging was more favorable than not hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

59. A futures hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

60. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

61. The price at which a currency put option allows the holder to sell a currency is called the settlement price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

62. A put option essentially represents two swaps of currencies, one swap at the inception of the loan contract and another swap at a specified date in the future.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

63. The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

64. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

65. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

66. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

67. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

68. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

69. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of \$.68 and a premium of \$.02 is available. Also, a 180-day put option with an exercise price of \$.66 and a premium of \$.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is \$.67, what is the amount received from the currency option hedge (after considering the premium paid)?
a. \$330,000
b. \$325,000
c. \$320,000
d. \$340,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

72. You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of \$.01 per unit and an exercise price of \$.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:

Future Spot Rate Probability
\$.01035 20%
\$.01032 20%
\$.01030 30%
\$.01029 30%

The 90-day forward rate of the Japanese yen is \$.01033.

What is the probability that the call option will be exercised (assuming Montana purchased it)?
a. 30%
b. 60%
c. 20%
d. 40%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

73. If an MNC assesses net transaction exposure, this refers to the consolidation of all expected inflows for a particular time and currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Comprehension

74. Most MNCs do not perceive their foreign exchange management as a profit center. Rather, their main responsibility is to assess potential exposure and determine how and if the exposure should be hedged.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

75. If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

76. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

77. To hedge a payable position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the U.S. until the payable is due.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

78. If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

79. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

80. An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

81. To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

82. Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

83. If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

85. Most MNCs can completely hedge all of their transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

86. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

87. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

88. Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

89. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

90. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a. index
b. futures
c. forward
d. money market
e. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

91. A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
a. the foreign currency; U.S.
b. the foreign currency; foreign country
c. dollars; foreign country
d. dollars; U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

92. FAI Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90-day call option with an exercise price of \$0.75 and a premium of \$0.01 is available. Also, a 90-day put option with an exercise price of \$0.73 and a premium of \$0.01 is available. FAI plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$0.71, what is the net amount received from the currency option hedge?
a. \$219,000
b. \$222,000
c. \$216,000
d. \$213,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

Chapter 12—Managing Economic Exposure and Translation Exposure

1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
b. be reduced; selling
c. increase; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

2. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. be unaffected by; benefit from
e. benefit from; benefit from

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

3. Whitewater Co. is a U.S. company with sales to Canada amounting to C\$8 million. Its cost of materials attributable to the purchase of Canadian goods is C\$6 million. Its interest expense on Canadian loans is C\$4 million. Given these exact figures above, the dollar value of Whitewater’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of Whitewater’s cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by \$800,000. This strategy would ____ the Sycamore’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

5. Which of the following is an example of economic exposure but not an example of transaction exposure?
a. An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.
b. An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
c. A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
d. A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

6. Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)
a. The dollar value of sales is higher if the pound depreciates against the dollar.
b. The dollar value of sales is unaffected by the pound’s exchange rate.
c. A and B
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

7. If a U.S. firm’s expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

8. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

9. Any restructuring of operations that ____ the difference between a foreign currency’s inflows and outflows may ____ economic exposure.
a. reduces; increase
b. increases; reduce
c. reduces; reduce
d. A and B
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

10. It is generally least difficult to effectively hedge various types of:
a. translation exposure.
b. transaction exposure.
c. economic exposure.
d. A and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

11. With regard to hedging translation exposure, translation losses ____, and gains on forward contracts used to hedge translation exposure ____.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

12. If a firm does not have foreign subsidiaries, it is not subject to ____.
a. transaction exposure
b. economic exposure
c. A and B
d. translation exposure

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

13. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.
a. negative
c. favorably affected
d. unaffected

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

14. Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.
a. loss; smaller
b. loss; larger
c. gain; larger
d. gain; smaller

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

15. A perfect hedge (full coverage) on translation exposure can usually be achieved when:
a. using the money market hedge.
b. using the forward hedge.
c. using the futures hedge.
d. none of the above, since a perfect hedge is nearly impossible.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

16. Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
a. closing down most of its plants in the U.S.
b. producing more automobiles in the U.S.
c. relying completely on Japanese suppliers for its parts.
d. pricing its exports in dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

17. Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?
a. increase Zambian supply orders.
b. increase Zambian sales.
c. restructure debt to increase debt payments in Zambia.
d. reduce Zambian sales.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

18. Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent.
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses.
c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany.
d. All of the above firms are exposed to translation exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

19. ____ represents any impact of exchange rate fluctuations on a firm’s future cash flows.
a. Translation exposure
b. Economic exposure
c. Transaction exposure
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

20. An effective way for an MNC to assess its economic exposure is to review the firm’s:
a. income statement.
b. liquidity.
c. retained earnings.
d. level of stockholders’ equity.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

21. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency.
b. cash outflows exceed cash inflows in each foreign currency.
c. cash inflows match cash outflows in each foreign currency.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

22. Managing economic exposure is generally perceived to be ____ managing transaction exposure.
a. more difficult than
b. less difficult than
c. just as difficult as
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

23. As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution.
a. short-term
b. long-term
c. immediate
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Knowledge

24. Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.
a. positive; positively
b. positive; negatively
c. negative; positively
d. B and C
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

25. Assume that an MNC’s cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

26. An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC’s foreign currency revenues will convert to ____ dollars.
a. more; fewer
b. more; more
c. less; fewer
d. less; more

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

27. An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.
a. asset; matches
b. asset; exceeds
c. liability; matches
d. liability; is less than

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.03
KEY: Bloom’s: Comprehension

28. Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.03
KEY: Bloom’s: Knowledge

29. ____ exposure occurs when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. Translation
b. Transaction
c. Economic
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

30. ____ is (are) not a limitation of hedging translation exposure.
a. Inaccurate stock price forecasts
b. Inadequate forward contracts for some currencies
c. Taxation on gains from forward contracts
d. Increased transaction exposure

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

31. To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.
a. purchase the currency forward
b. sell the currency forward
c. purchase futures contracts of the currency
d. A or C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

32. Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.
a. tax deductible; not taxed
b. not tax deductible; not taxed
c. not tax deductible; taxed
d. tax deductible; taxed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

33. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

34. A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

35. U.S. firms can attempt to hedge their translation exposure of their European subsidiaries with a forward purchase of euros.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

36. Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

37. A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

38. The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

39. All MNCs are subject to translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

40. U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies were probably less affected by the weakness of Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

41. The management of economic exposure is normally focused completely on transactions that will occur in the next three months.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

42. Transaction exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

43. Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

44. Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
b. decrease; selling
c. increase; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

45. Sarakose Co. is a U.S. company with sales to Canada amounting to C\$5 million. Its cost of materials attributable to the purchase of Canadian goods is C\$7 million. Its interest expense on Canadian loans is C\$5 million. The dollar value of Sarakose’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

46. If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

47. Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its supplies from American firms and has no competition in the U.S. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains its supplies from a Canadian firm. Based on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure.
a. transaction; translation
b. translation; transaction
c. economic; transaction
d. economic; translation

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

48. Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to ____ exposure.
a. economic
b. transaction
c. translation
d. economic and transaction

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

49. Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C\$500,000 next year. The Canadian dollar is valued at about \$.90. The net cash flows from U.S. operations are supposed to be \$200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:
b. increase its borrowings in U.S.
c. decrease prices on Canadian goods.
d. decrease its borrowed funds in Canada.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

50. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury’s consolidated earnings were ____ affected by the euro’s movement, and Mercury’s hedge position was ____ affected by the euro’s movement.
a. favorably; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

51. All MNCs are subject to transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

52. A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

53. Economic exposure represents any impact of exchange rate fluctuations on a firm’s future cash flows and thus includes transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

54. To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Knowledge

55. When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility in restructuring operations is to reduce foreign sales.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

56. Even if translation exposure does not affect cash flows, it is a concern of many MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

57. Translation exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

58. Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

59. Which of the following statements is incorrect?
a. Transaction exposure represents only the exchange rate risk when converting net foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send payments.
b. Economic exposure represents any impact of exchange rate fluctuations on a firm’s future cash flows.
c. Firms can simply focus on hedging their foreign currency payables and/or receivables to hedge economic exposure.
d. The management of economic exposure tends to serve as a long-term solution rather than just a short-term solution.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

60. Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from imports from Cyprus. However, Thornton’s revenues are denominated solely in U.S. dollars. Which of the following is probably not true?
a. Thornton would benefit from a depreciation of the Cyprus pound.
b. Thornton has at least some transaction exposure.
c. Thornton has at least some economic exposure.
d. Thornton has at least some translation exposure.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

61. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

62. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would ____ from a(n) ____ of the Jamaican dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. not benefit; depreciation
e. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

63. ____ is (are) a limitation of hedging translation exposure.
a. Inaccurate earnings forecasts
b. Inadequate forward contracts for some currencies
c. Accounting distortions
d. Increased transaction exposure
e. All of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

Chapter 13—Direct Foreign Investment

1. Based on the text, it should be obvious that markets are ____ in reality, and consequently, monopolistic advantages ____ be exploited.
a. perfect; may possibly
b. perfect; cannot
c. imperfect; may possibly
d. imperfect; cannot

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

2. When a firm analyzes the feasibility of a project, it should consider the:
a. variability of the project’s cash flow.
b. correlation of the project’s cash flow relative to the prevailing cash flows of the MNC.
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

3. The ____ a project’s variability in cash flows, and the ____ the positive correlation between the project’s cash flow and the MNC’s cash flow, the lower the risk of the project.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

4. The most important cost-related motive for direct foreign investment is diversification across product markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

5. Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____.
a. higher; large
b. higher; small
c. lower; small
d. higher; large

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

6. According to the text, a firm may be able to achieve a “more efficient” project portfolio if it:
a. focuses solely on one product.
b. focuses solely on one location to market what it produces.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

7. According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:
a. would compete with local firms of the host country.
b. would produce a good not currently available in the host country.
c. would produce a good and export it to other countries.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

8. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.
a. high and positive; more
b. close to zero; more
c. high and positive; less
d. close to zero; less

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

9. A firm will likely benefit most from diversifying if:
a. the correlations between country economies are high.
b. the correlations between country economies are low.
c. the variability of all country economy levels is high.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

10. When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

11. Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of ____ motives by U.S. firms that engage in direct foreign investment.
a. revenue-related
b. cost-related
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

12. Which of the following is a reason to consider international business?
a. economies of scale.
c. diversification.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

13. From the concept of an “efficient frontier,” the point on a frontier that is optimal for all firms:
a. is the top point.
b. is the point closest to the vertical axis.
c. is the point half way between the two end points.
d. cannot be determined since firms vary in their willingness to accept risk.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

14. Direct foreign investment is perceived by foreign governments to:
a. be a cause of national problems.
b. be a remedy for national problems.
c. either A or B is possible.
d. have no impact on national problems.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

15. Direct foreign investment would typically be welcomed if:
a. the products to be produced are substitutes for other locally produced products.
b. people from the country of the company’s headquarter are transferred to the foreign country to work at the subsidiary.
c. the products to be produced are going to be exported.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

16. Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.
a. increase; postpone remitting earnings until the pound strengthens
b. decrease; postpone remitting earnings until the pound strengthens
c. decrease; remit earnings immediately before the pound strengthens
d. increase; remit earnings immediately before the pound strengthens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

17. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?
a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

18. Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:
a. the host government of that country eliminates all quotas.
b. the host government of that country reduces all quotas.
c. the host government of that country increases all quotas.
d. the host government of that country eliminates all tariffs.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

19. A country with high unemployment could best increase its employment by:
a. encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
b. encouraging foreign firms to establish licensing arrangements for products local firms produce.
c. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
d. none of the above would reduce employment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

20. According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.
a. Paraguay
b. Morocco
c. Sweden
d. China

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

21. ____ is not a disadvantage of direct foreign investment.
a. The expense of establishing a foreign subsidiary
b. The uncertainty of inflation and exchange rate movements
c. Political risk
d. All of the above are disadvantages of direct foreign investment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

22. Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm’s overall returns.
a. decrease
b. increase
c. decrease or increase, depending on the exact size of the returns and standard deviations
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Application

23. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b. Host governments generally perceive DFI as a remedy to eliminate a country’s political problems.
c. The ability of a host government to attract DFI is dependent on the country’s markets and resources.
d. Some types of DFI will be more attractive to some governments than to others.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

24. Which of the following is not true regarding the efficient frontier considered by MNCs?
a. There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.
b. The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects.
c. Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
d. All of the above are true.
e. A and C are false.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

25. Which of the following is not a cost-related motive of direct foreign investment?
a. International diversification.
b. Low labor costs.
c. Land can be purchased at a low price.
d. Manufacturing plants can be built for a low price.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

26. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

27. ____ is not a revenue-related motive for direct foreign investment.
a. Attracting new sources of demand
b. Fully benefiting from economies of scale
d. Entering profitable markets

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

28. ____ is not a cost-related motive for direct foreign investment.
b. Fully benefiting from economies of scale
c. Using foreign factors of production
d. Using foreign raw materials

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

29. When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.
a. overvalued; high
b. overvalued; low
c. undervalued; high
d. undervalued; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

30. Developing countries are mostly targeted because they have advanced technology.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

31. Direct foreign investment is normally completed first, and then capital budgeting can be applied later.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

32. The best means to accomplish the revenue-related motive of attracting new sources of demand is to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

33. To enter markets where superior profits are possible, an MNC should:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

34. To exploit monopolistic advantages, an MNC should:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets where competitors are unable to produce the identical product.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

35. To fully benefit from economies of scale, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other operations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

36. To use foreign factors of production, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other operations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

37. They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

38. When economic conditions of two countries are ____, then a firm would ____ its risk by operating in both countries instead of concentrating just in one.
a. highly correlated; reduce
b. not highly correlated; not reduce
c. not highly correlated; reduce
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

39. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as “optimal” for all MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

40. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

41. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

42. Although direct foreign investment is sometimes conducted, benefits are rarely realized.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

43. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

44. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

45. In assessing the risk of an individual project, the expected correlation of the new project’s returns with those of the prevailing business should be considered.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

46. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

47. Countries in eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in western Europe.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

48. Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.
a. increase; postpone remitting earnings until the euro weakens
b. decrease; postpone remitting earnings until the euro weakens
c. decrease; remit earnings immediately before the euro weakens
d. increase; remit earnings immediately before the euro weakens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Application

49. To diversify internationally for the purpose of reducing risk, which strategy is appropriate?
a. Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based.
b. Establish a subsidiary in a market that has relatively low cost of labor or land.
c. Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time.
d. Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

50. To fully benefit from use of foreign raw materials:
a. establish a subsidiary in a market where raw materials are cheap and accessible.
b. sell the finished product to countries where the raw materials are more expensive.
c. establish a subsidiary in a new market that can sell products produces elsewhere.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

51. Procedural and documentation requirements imposed by the foreign government are referred to as:
a. regulatory barriers.
b. industry barriers.
c. protective barriers.
d. “Red Tape” barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

52. Constraints pertaining to taxes, currency convertibility, earnings remittance, and employee rights are best described as:
a. ethical differences.
b. regulatory barriers.
c. quota barriers.
d. “Red Tape” barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

53. Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:
a. protective barriers.
b. “red tape” barriers.
c. ethical differences.
d. regulatory barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

54. The overall variability of a firm’s returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

55. MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

56. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

57. Direct foreign investment is commonly considered by MNCs because it allows the MNC to:
a. attract new sources of demand.
b. enter profitable markets.
c. react to exchange rate movements.
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

58. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b. Host governments generally perceive DFI as a remedy for their national problems.
c. The ability of a host government to attract DFI is dependent on the country’s markets and resources.
d. Some types of DFI will be more attractive to some governments than to others.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

59. ____ is not a cost-related motive for direct foreign investment (DFI).
a. Using foreign factors of production
b. Using foreign raw materials
c. Using foreign technology
e. Fully benefiting from economies of scale

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

60. When a foreign currency is perceived by a firm to be ____, the firm will probably ____ direct foreign investment in that country.
a. undervalued; consider
b. undervalued; not consider
c. overvalued; not consider
d. A and C
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

61. The best means of using direct foreign investment (DFI) to fully benefit from cheap foreign factors of production is probably to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary in a new market that can sell products produced elsewhere; this allows for increased production and possibly greater production efficiency.
c. establish a subsidiary in a market that has relatively low costs of labor and land; sell the finished product to countries where the cost of production is higher.
d. establish a subsidiary in a market in which raw materials are cheap and accessible; sell the finished product to countries in which the raw materials are more expensive.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

62. The ____ the correlation in project returns is over time, the ____ will be the project portfolio risk as measured by the portfolio variance.
a. lower; lower
b. higher; lower
c. lower; higher
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

Chapter 14—Multinational Capital Budgeting

1. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a ____ after the subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
d. B and C are both ideal.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
b. a payback period.
c. certainty equivalents.
d. simulation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

3. When evaluating international project cash flows, which of the following factors is relevant?
a. future inflation.
b. blocked funds.
c. exchange rates.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary’s perspective, which variable will most likely influence the capital budgeting analysis?
a. the withholding tax rate.
b. the euro’s exchange rate.
c. the U.S. tax rate on earnings remitted to the U.S.
d. the German government’s tax rate.
e. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

7. In capital budgeting analysis, the use of a cumulative NPV is useful for:
a. determining a probability distribution of NPVs.
b. determining the time required to achieve a positive NPV.
c. determining how the required rate of return changes over time.
d. determining how the cost of capital changes over time.
e. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Knowledge

8. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:
a. the cost of borrowing funds in the U.K.
b. the economic conditions in the U.K.
c. the parent’s cost of capital.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

10. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
a. the subsidiary finances the entire investment by local borrowing.
b. the subsidiary finances most of the investment by local borrowing.
c. the parent finances most of the investment.
d. the parent finances the entire investment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

11. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be ____ affected by the project.
c. favorably; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

12. An MNC is considering establishing a two-year project in New Zealand with a \$30 million initial investment. The firm’s cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ\$12 million in Year 1 and NZ\$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of \$.60 per NZ\$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

13. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
a. fixed
b. volatile
c. stable
d. none of the above, as the firm is not exposed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

14. If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

15. Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

16. If a multinational project is assessed from the subsidiary’s perspective, withholding taxes are ignored for project assessment.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

17. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

18. The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:
a. the taxes are the same as in the U.S.
b. there are no blocked fund restrictions.
c. the currency of the host country is expected to depreciate consistently.
d. none of the above; a discrepancy is not possible.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

19. The break-even salvage value of a particular project is the salvage value necessary to:
a. offset any losses incurred by the subsidiary in a given year.
b. offset any losses incurred by the MNC overall in a given year.
c. make the project have zero profits.
d. make the project’s return equal the required rate of return.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

20. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.
a. very high; limited
b. very low; limited
c. very low; numerous
d. very high; numerous

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Comprehension

21. One foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent’s perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent’s perspective.
a. negative
b. higher than that for the Hungarian project
c. lower than that for the Hungarian project
d. the same as that for the Hungarian project
e. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

22. Exchange rates for purposes of multinational capital budgeting:
a. are very difficult to forecast.
b. can be easily hedged with currency swaps.
c. are unimportant, as they do not affect the cash flows of the multinational project.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

23. A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.
a. lower
b. increase
c. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
d. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Application

Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is \$5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):

Year 1 Year 2 Year 3 Year 4
NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000

The current exchange rate of the Norwegian kroner is \$.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:

Year 1 Year 2 Year 3 Year 4
\$.13 \$.14 \$.12 \$.15

24. Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a. −\$803,848.
b. \$5,803,848.
c. \$1,048,829.
d. none of the above

25. Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is \$____.
a. 510,088.04
b. 1,710,088
c. 1,040,000
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Application

26. Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%?
a. −\$17,602.62.
b. \$8,000,000.
c. \$1,048,829.
d. \$645,147.

27. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A\$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest \$1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be \$.55 and \$.60, respectively?
a. \$2,905,817.
b. −\$94,183.
c. \$916,128.
d. none of the above

28. Which of the following is not a characteristic of a country to be considered within an MNC’s international tax assessment?
a. corporate income taxes.
b. withholding taxes.
c. provisions for carrybacks and carryforwards.
d. tax treaties.
e. all of the above are characteristics to be considered.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

29. Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.
a. withholding taxes
b. excise taxes
c. tax credits
d. carryforwards

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

30. If the parent’s government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.
a. high; subsidiary’s
b. high; parent’s
c. low; parent’s
d. A and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

31. If a subsidiary project is assessed from the subsidiary’s perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.
a. positively
b. negatively
c. either positively or negatively, depending on the percentage appreciation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

32. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:
a. the parent’s perspective should be used to evaluate a foreign project.
b. the subsidiary’s perspective should be used to evaluate a foreign project.
c. the foreign project should enhance the value of both the parent and the subsidiary.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

33. The ____ is (are) likely the major source of funds to support a particular project.
a. initial investment
b. variable costs
c. fixed costs
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

34. Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined on a proposed foreign project.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

35. The required rate of return of a project is ____ the MNC’s cost of capital.
a. greater than
b. less than
c. the same as
d. any of the above, depending on the specific project

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

36. An international project’s NPV is ____ related to the size of the initial investment and ____ related to the project’s required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

37. An international project’s NPV is ____ related to consumer demand and ____ related to the project’s salvage value.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

38. Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project’s NPV will be.
a. higher; lower
b. higher; higher
c. lower; higher
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

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

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

40. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
a. a more pronounced impact on revenues than on costs.
b. a less pronounced impact on revenues than on costs.
c. the same impact on revenues as on costs.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

41. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.
a. should be; should be
b. should definitely not be; should definitely not be
c. should definitely not be; should be
d. should be; should definitely not be

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

42. As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent’s exchange rate exposure ____.
a. increases; decreases
b. decreases; increases
c. increases; increases
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

43. In conducting a multinational capital budgeting analysis, the subsidiary’s perspective should always be used.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

44. The feasibility of a multinational project from the parent’s perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

45. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

46. In multinational capital budgeting, depreciation is treated as a cash outflow.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

47. No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

48. If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary’s investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

49. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

50. When managers use NPV analysis, agency costs are eliminated, and governance is not needed to monitor MNC decisions regarding projects.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

51. Sometimes, a multinational project may appear feasible from the subsidiary’s perspective but not from the parent’s perspective and vice versa.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

52. Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate in attempting to determine whether a project will enhance the firm’s value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

53. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

54. If a parent’s perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

55. If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

56. Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Knowledge

57. The greater the uncertainty about a project’s forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

58. The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

59. ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s after-tax cash flows.
a. The number of units sold by the subsidiary
b. The subsidiary’s earnings before income and taxes (EBIT)
c. The tax rate the subsidiary is subject to in the host country
d. Withholding taxes imposed by the host government

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

60. ____ is an input required for a multinational capital budgeting analysis, given that it is conducted from the parent’s viewpoint.
a. Salvage value
b. Price per unit sold
c. Initial investment
d. Consumer demand
e. All of the above are inputs required for capital budgeting analysis.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

61. ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
a. Discriminant analysis
c. Sensitivity analysis
d. Simulation

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Knowledge

62. Which of the following is not true regarding simulation?
a. It can be used to generate a probability distribution of NPVs.
b. It generates a probability distribution of NPVs by randomly drawing values for the input variable(s).
c. It can only be used for one variable at a time.
d. It can be used to develop probability distributions of all variables with uncertain future values.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

63. Which of the following is not a factor that should be considered in multinational capital budgeting?
a. Blocked funds
b. Exchange rate fluctuations
c. Inflation
d. Financing arrangements
e. All of the above should be considered.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

Chapter 15—International Corporate Governance and Control

1. International governance is achieved by all of the following except:
a. poison pills.
b. board of directors.
c. institutional investors.
d. blockholders.
e. All of the above achieve governance.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

2. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?
a. The firm can immediately expand its international business.
b. An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary.
c. International acquisitions are generally cheaper than the establishment of a new subsidiary.
d. An international acquisition typically generates larger cash flows than the establishment of a new subsidiary.
e. All of the above are advantages of international acquisitions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

3. According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.
a. the U.K.
b. Mexico
c. Japan
d. Germany
e. France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

4. Which of the following is not true regarding a target’s previous cash flows?
a. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.
b. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
c. They are always good indicators of future cash flows.
d. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

5. As far as the managerial talent of the target is concerned:
a. the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target.
b. downsizing will reduce expenses and increase productivity and revenues.
c. governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated.
d. all of the above
e. A and C only

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

6. Based on information in your text, all of the following factors should be considered in an international acquisition, except:
a. the target’s willingness to be acquired.
b. the target’s previous acquisition history.
c. the target’s previous cash flows.
d. the target’s local economic conditions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

7. Which of the following tax-related factors need not be considered in assessing a foreign target?
a. corporate tax rates in the host country.
b. withholding tax rates in the host country.
c. withholding tax rates in the home country.
d. corporate tax rates in the home country.
e. all of the above must be considered in assessing a foreign target.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years.

• Cost of goods sold are expected to be 60% of revenues.

• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

• The Malaysian tax rate on the target’s earnings is expected to be 30%.

• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

• The target will need MYR9 million in cash each year to support existing operations.

• The target’s current stock price is MYR35 per share. The target has 11 million shares outstanding.

• Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently \$.23.

• Klimewsky’s required rate of return on similar projects is 13%.

8. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is \$____ million.
a. 155.9
b. 111.5
c. 138.0
d. 143.0
e. none of the above

9. Refer to Exhibit 15-1. The Malaysian target’s value based on its stock price is \$____ million.
a. 1.4
b. 1,673.9
c. 111.5
d. 88.6
e. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

10. Refer to Exhibit 15-1. The target’s board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer?
a. 30.0%.
b. 25.9%.
c. you should not offer any premium because the market’s valuation is below Klimewsky’s valuation.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

11. Which of the following would probably not cause the stock price of a foreign target to decrease?
a. Its expected cash flows decline.
b. General stock market conditions in the foreign country are deteriorating.
c. Investors anticipate that the target will be acquired.
d. All of the above will cause the target’s stock price to decrease.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

12. Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target?
a. differences in the timing of remittances from the target to the parent.
b. differences in the desired use of the target.
c. differences in the local risk-free interest rate.
d. differences in the ability to use financial leverage.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Comprehension

13. Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?
a. international acquisition.
c. international alliance.
d. international divestiture.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

14. A previously undertaken project in a foreign country may no longer be feasible because:
a. interest rates have declined.
b. the MNC’s cost of capital has decreased.
c. the host government has increased its tax rates substantially.
d. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

15. An international alliance typically requires a ____ initial outlay than an international acquisition, and the cash flows to be received will typically be ____ than the cash flow resulting from an international acquisition.
a. smaller; larger
b. smaller; smaller
c. larger; smaller
d. larger; larger

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Comprehension

16. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

17. At present, U.S. firms acquire more targets in the former Soviet Union than in any other country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

18. The U.S. is one of the few countries with agencies that monitor mergers and acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

19. The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

20. Since the cash flows generated by a foreign target will eventually be converted to the parent’s currency, there is no need to consider the foreign exchange rate in the capital budgeting process.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

21. From an acquirer’s perspective, the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

22. Premiums required to entice a target’s board of directors to approve an acquisition are usually between 1 and 3 percent of the target’s market price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

23. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

24. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

25. The valuation of a target (from the parent’s perspective) should increase when the potential acquirer’s cost of capital increases.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Comprehension

26. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

27. Acquirers may have different required rates of return because of differences in the ability to use financial leverage.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

28. An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

29. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target’s country are generally high.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

30. Privatization involves the sale of previously government-owned businesses by the government.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

31. An MNC should periodically reassess its investments to determine whether to divest them.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

32. The initial outlay for a project in a foreign country may decline if property values in that country decline.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

33. The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign target that has operated privately for several years.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

34. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:
a. the Chinese yuan would depreciate in the future.
b. the Chinese yuan would appreciate in the future.
c. the Chinese yuan would remain somewhat stable in the future.
d. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Application

35. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary?
a. the required rate of return on the subsidiary.
b. forecasted exchange rates of the subsidiary’s currency relative to the dollar.
c. the initial outlay on the project.
d. the possible selling price of the project.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

36. Regarding the valuation of privatized businesses in less developed countries, ____ can normally be estimated with a high degree of accuracy.
a. future cash flows
b. future exchange rate movements
c. the proper discount rate
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

37. U.S. firms acquire more target firms in ____ than in any other country.
a. Spain
b. Italy
c. Belgium
d. United Kingdom

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

38. Firms based in ____ tend to acquire more U.S. target firms than the other countries listed here.
b. Japan
c. Germany
d. Mexico

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

39. The sale of a subsidiary by an MNC is referred to as a divestiture.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

40. An MNC’s parent would consider investing in a target only if the estimated present value of the cash flows it would ultimately receive from the target over time ____ the initial outlay necessary to purchase the target.
a. is less than
b. is the same as
c. is greater than
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

41. Which of the following would not enhance the value of a target from the acquirer’s perspective?
a. Expected sales of the target have increased.
b. The subsidiary’s currency is expected to strengthen after the acquisition.
c. The required rate of return from investing in the target has increased.
d. All of the above would enhance the value of the target.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

42. An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a public target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

43. A target’s previous cash flows are typically an accurate indicator of future cash flows, especially when the target’s cash flows would have to be converted into the acquirer’s home currency as they are remitted to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

44. Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.
a. strong; lower
b. weak; higher
c. weak; lower
d. strong; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

45. When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____.
a. low; not excessive
b. high; excessive
c. high; not excessive
d. low; excessive

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

46. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement.
a. low
b. high
c. volatile
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

47. If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

48. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.
a. 2.4
b. 60.0
c. 41.7
d. 12

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

49. If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.
a. appreciates; by a lesser percentage then
b. depreciates; in the same proportion as
c. appreciates; in the same proportion as
d. appreciates; by a greater percentage than

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

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

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

51. Even after an MNC’s accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

52. An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

53. The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when assessing acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

54. When viewed as a project, the international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

55. Downsizing reduces expenses but may also reduce productivity and revenue.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

56. Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target’s home country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

57. When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

58. Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Comprehension

59. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

60. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

61. The value of an MNC (from the parent’s perspective) is independent of the MNC’s desired scheduling of remitted funds from the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

62. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

63. While acquisitions of privatized businesses may be attractive because of the potential for MNCs to increase their efficiency, the valuation of these businesses is generally more difficult.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

64. It is always the best course of action to divest of a foreign project if the expected cash flows from the project decline substantially.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

65. The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

66. The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly after a bid by the acquiring firm.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Comprehension

67. A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the same industry to the private company’s earnings.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

68. The ideal time to purchase a foreign company is when the spot rate of that company’s currency is perceived to be very high and is expected to decrease over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

69. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?
a. The firm can immediately expand its international business.
b. The firm benefits from existing customer relationships.
c. International acquisitions are generally cheaper than the establishment of a new subsidiary.
d. An international acquisition typically generates quicker and larger cash flows than the establishment of a new subsidiary.
e. All of the above are advantages of international acquisitions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

70. An MNC valuing a foreign target for acquisition purposes must account for all of the following, except:
a. the foreign exchange rate.
b. withholding taxes imposed by the host government.
c. blocked-funds restrictions.
d. income taxes imposed by the U.S. government.
e. An MNC must account for all of the above.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

71. According to your text, all of the following are factors to be considered in an international acquisition, except
a. the target’s willingness to be acquired.
b. the target’s previous acquisition history.
c. the target’s previous cash flows.
d. the target’s local economic conditions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

72. Which of the following would probably not cause the stock price of a foreign target to decrease?
a. Its expected cash flows decline.
b. General stock market conditions in the foreign country are deteriorating.
c. Investors anticipate that the target will be acquired.
d. All of the above will cause the target’s stock price to decrease.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

73. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?
a. Differences in estimated cash flows to be generated by the foreign target
b. Differences in estimated exchange rates
c. Differences in required rates of return
d. All of the above are possible reasons why the valuation of a foreign target may vary among MNCs

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

74. The valuation of a newly privatized business is generally more difficult than the valuation of a publicly traded firm because:
a. It has previously operated in environments of very high competition.
b. Interest rates in the countries where privatization takes place are extremely high.
c. The stock markets in the countries where privatization takes place are overvalued.
d. Economic conditions in the countries where privatization takes place are very uncertain.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

Chapter 16—Country Risk Analysis

1. A macro-assessment of country risk:
b. excludes all aspects relevant to a particular firm or project.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

2. A micro-assessment of country risk:
b. excludes all aspects relevant to a particular firm or project.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

3. The Delphi technique:
a. is a method of purchasing information about inspections of the country being evaluated.
b. requires the use of discriminant analysis to assess country risk.
c. involves the collection of independent opinions on country risk.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

4. The checklist approach:
a. requires several inspections of the country being evaluated.
b. requires the use of discriminant analysis to assess country risk.
c. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
d. involves the collection of independent opinions on country risk.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

5. The most important variable in determining a country’s degree of overall country risk:
a. is political risk.
b. is financial risk.
c. is the probability of a host government takeover.
d. may often vary with the country of concern.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

6. According to the text, country risk analysis has:
a. almost always detected problems before they occur.
b. been effectively used in place of capital budgeting to determine whether a project should be accepted.
c. been perfected as a result of the development of discriminant analysis.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

7. To best reduce exposure to a host government takeover, a subsidiary could:
a. use a long-run profit perspective for business in that country.
b. hire people from its own country (where the parent is located).
c. attempt to obtain supplies from its parent for which substitutes are not available.
d. borrow funds from its parent rather than from the host country’s creditors.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

8. Insurance purchased to cover the risk of expropriation ____, and will typically cover ____.
a. will be the same for all firms; only a portion of the firm’s total exposure.
b. will be the same for all firms; all of the firm’s total exposure.
c. will be dependent on the firm’s risk; all of the firm’s total exposure.
d. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

9. Country risk assessment should be used when:
a. determining whether to establish a subsidiary in a foreign country.
b. determining whether to continue business in a foreign country.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

10. When determining whether a particular proposed project in a foreign country is feasible:
a. a country risk rating can adequately substitute for a capital budgeting analysis.
b. country risk analysis should be incorporated within the capital budgeting analysis.
c. the effect of country risk on sales revenue is more important than the effect on cash flows.
d. the project with the highest country risk rating (lowest country risk) should be accepted.
e. B and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

11. The primary purpose of country risk analysis when applied to capital budgeting is usually to:
a. measure the effect of country risk on sales.
b. measure the effect of country risk on cash flows.
c. measure the effect of country risk on the consolidated balance sheet.
d. measure the effect of country risk on the consolidated income statement.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

12. If a foreign country’s consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is to:
a. use a licensing arrangement with a local firm in that country.
b. enter into a joint venture in that country.
c. develop a subsidiary (under the U.S. name) that manufactures and sells products in that country.
d. develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

13. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary’s ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:
a. the host government’s tax rates charged on remitted earnings.
b. the possibility of blocked funds.
c. the state of the economy in Germany.
d. the possibility of a withholding tax imposed by the German government.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

14. An MNC has a foreign manufacturing plant to capitalize on cheap production costs; the MNC exports all the goods produced. It should be most concerned about the country’s:
a. growth in gross domestic product.
b. government policies designed to increase tariffs on imported goods.
d. government environmental regulations and taxes on the lease or purchase of a production site.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

15. A firm may incorporate a country risk rating into the capital budgeting analysis by:
a. adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark level.
b. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

16. According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to:
a. compare each form of a country risk rating to a benchmark level.
b. estimate the effect of each form of country risk on cash flows.
c. estimate the effect of each form of country risk on the income statement and balance sheet.
d. adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

17. The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with:
a. insurance that covers losses on multilateral netting procedures.
b. exchange rate risk insurance.
c. political risk insurance.
d. guarantees that MNCs will receive the same taxation treatment by the host government as local firms.
e. guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

18. Country risk analysis is important because it:
a. focuses on whether to hedge contractual transactions.
b. focuses on the competitor firms in its industry.
c. can be used to improve the analysis used to make long-term investing decisions.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

19. ____ is (are) not a form of political risk.
a. Exchange rate movements
b. Attitude of consumers in the host country
c. Actions of the host government
d. Blockage of fund transfers
e. All of the above are forms of political risk

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

20. Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture personal computers, while MNC B is considering the establishment of a subsidiary to manufacture tanks. Which of the two MNCs is likely to be less affected by the low macro-assessment?
a. MNC A.
b. MNC B.
c. both will be equally affected, since the macro-assessment does not vary.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

21. Which of the following is not a technique to assess country risk?
a. Gamma technique.
b. Delphi technique.
c. checklist approach.
d. inspection visits.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

22. The ____ involves the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.
a. checklist approach
b. discriminant analysis
c. regression analysis
d. Delphi technique

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

23. When quantifying country risk:
a. weights should be equally allocated among factors.
b. weights should be assigned to the political and financial factors according to their perceived importance.
c. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
d. the derived factors will be identical for all MNCs conducting business in that country.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

24. Which of the following is not a strategy that could be used by an MNC to reduce its exposure to a host government takeover?
a. Attempt to recover cash flows from a foreign investment as quickly as possible
b. Rely on unique supplies and/or technology
c. Hire local labor
d. Borrow local funds
e. All of the above are strategies to reduce an MNC’s exposure to a host government takeover.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

25. MNCs can purchase insurance to cover the risk of expropriation. Which of the following is not a source of this type of insurance?
a. the World Bank.
b. the Overseas Private Investment Corporation (OPIC).
c. the International Monetary Fund (IMF).
d. all of the above are sources for insurance against expropriation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

26. Which of the following is not a way in which country risk analysis can be used?
a. to monitor countries where an MNC is currently doing business.
b. as a screening device to avoid conducting business in countries with excessive risk.
c. to revise an MNC’s financing decisions.
d. to determine the degree to which the MNC is exposed to exchange rate movements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

27. An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

28. ____ is not a political risk factor.
a. High interest rates in a foreign country
b. Currency inconvertibility
c. War
d. Corruption

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

29. A mild form of political risk is a tendency of residents to purchase only:
a. imported products.
b. locally produced products.
c. products produced by MNCs.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

30. To make an MNC’s operations coincide with its own goal, a host government could do all of the following, except:
a. require the use of local employees for managerial positions.
b. require social facilities.
c. subsidize the MNC.
d. require environmental controls.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

31. When a country’s currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

32. When the war in Iraq began in 2003, some MNCs feared that oil prices would ____ and that U.S. inflation and interest rates would ____.
a. rise; rise
b. fall; fall
c. rise; fall
d. fall; rise

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

33. Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC’s product.
a. increase; increase
b. reduce; reduce
c. increase; reduce
d. reduce; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

34. A ____ currency may ____ the volume of products imported by the country and therefore reduce the country’s production and national income.
a. weak; increase
b. weak; reduce
c. strong; increase
d. strong; reduce

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

35. Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

36. ____ involve(s) the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.
a. The checklist approach
b. The Delphi technique
c. Quantitative analysis
d. Inspection visits

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

37. Perhaps the most appropriate method for incorporating forms of country risk in a capital budgeting analysis is to estimate how the ____ would be affected by each form of risk.
a. discount rate
b. cash flows
c. opportunity cost
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

38. Since country risk is constantly changing and events in other parts of the world are largely unpredictable, country risk analysis is not important for MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

39. A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host government.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

40. Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC’s products.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

41. When using a checklist approach to assess country risk, factors should be converted to some numerical forms and assigned equal weights.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

42. Unlike project risk, country risk cannot be incorporated into the capital budgeting analysis of a proposed project by adjustment of the discount rate or by adjustment of the estimated cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

43. After a project is accepted and implemented, country risk does not need to be monitored; since the project is already established, no further changes can be made.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

44. While an overall risk rating of a country can be useful, it cannot always detect upcoming crises.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

45. Country risk can affect an MNC’s cash flows but cannot affect its cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

46. To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

47. The weights assigned to factors when assessing country risk should always be higher for the political risk factors than the financial factors.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

48. A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

49. Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

50. U.S.-based MNCs could avoid country risk by simply avoiding international business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

51. If an MNC diversifies its operations internationally to reduce its exposure to any individual country’s problems, country risk analysis becomes irrelevant.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

52. Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC’s business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

53. Adjustments to incorporate country risk into the capital budgeting analysis would involve either the addition of a risk premium to the discount rate or a reduction of the cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

54. Country risk analysis is important because it:
a. can be used by MNCs as a screening device to avoid countries with excessive risk.
b. can be used by MNCs to monitor countries where the MNC is presently engaged in international business.
c. can be used to improve the analysis used to make long-term investing or financing decisions.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

55. Which of the following is not a form of financial risk?
a. Exchange rate movements
b. Inflation rates
c. Blockage of fund transfers
d. All of the above are forms of financial risk.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

56. Which of the following is not an example of political risk?
a. The Japanese government requires an MNC’s subsidiary to install exercise rooms for its employees.
b. The Swiss government requires an MNC’s subsidiary to install filters in its manufacturing plants to reduce pollution.
c. Country X, considered for expansion, frequently goes to war with its neighbors.
d. Country Y’s government has recently taken over the subsidiary of one of your competitors, another U.S.-based MNC.
e. All of the above are examples of political risk.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

57. Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis?
a. Adjusting the discount rate upward
b. Adjusting the input variables to estimate the sensitivity of the project’s NPV
c. Adjusting the political risk rating to obtain a more favorable NPV
d. Country risk should be ignored in capital budgeting, since it is a subjective analysis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

Chapter 17—Multinational Cost of Capital and Capital Structure

1. An argument for MNCs to have a debt-intensive capital structure is:
a. they are well diversified.
b. they can reduce the chance of bankruptcy.
c. it spreads the shareholder base.
d. it forces subsidiaries to pay dividends to shareholders.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

2. According to the text, there is evidence that the debt ratios (debt/capital) of MNCs based in:
a. the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany.
b. China tend to be generally higher than MNCs headquartered in other non-U.S. countries.
c. the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

3. According to the text, the cost of capital for an international project will:
a. always be greater than the firm’s cost of capital.
b. always be less than the firm’s cost of capital.
c. always be the same as the firm’s cost of capital.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

4. Which of the following factors is not expected to generally have a favorable impact on the firm’s cost of capital according to the text?
b. high degree of international diversification.
c. high exposure to exchange rate fluctuations.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

5. The capital asset pricing theory is based on the premise that:
a. only unsystematic variability in cash flows is relevant.
b. only systematic variability in cash flows is relevant.
c. both systematic and unsystematic variability in cash flows are relevant.
d. neither systematic nor unsystematic variability in cash flows is relevant.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

6. According to the text, MNCs can:
a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Comprehension

7. The term “global” target capital structure for an MNC represents the MNC’s capital structure:
a. in the U.S.
b. relative to competitors across all countries.
c. where it has its largest subsidiary.
d. when consolidating all of its subsidiaries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

8. According to the text, an MNC’s “global” target capital structure is:
a. always debt-intensive.
b. always equity-intensive.
c. sometimes different from an MNC’s “local” capital structures (at subsidiaries).
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

9. One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC’s ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

10. One argument for why subsidiaries should be only partly-owned by the parent is:
a. that the potential conflict of interests between the MNC’s managers and shareholders is avoided.
b. that the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
c. that the potential conflict of interests between the MNC’s existing creditors is avoided.
d. to motivate subsidiary managers by allowing them partial ownership.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

11. The cost of capital incurred by U.S.-based MNCs is primarily driven by the global stock market volatility.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

12. Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.
a. young; high
b. old; high
c. old; low
d. young; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

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

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

14. Based on the factors that influence a country’s cost of capital, the cost of capital in less developed countries is likely to be ____ than that of the U.S. and ____ than that of Japan.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

15. According to the text, the cost of debt:
a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

16. The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local firms where the MNC’s subsidiary is based.
b. average capital structure of local firms where the MNC’s parent is based.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

17. The term “global capital structure” is used in the text to represent the:
a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic firms across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

18. An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

19. Assume that the risk-free interest rate in the U.S. is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M’s firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M had the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital would be ____ than that of the U.S. firm.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Application

20. When a country’s risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.
a. increases; increases
b. increases; is not affected
c. is not affected; increases
d. is not affected; is not affected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

21. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to your text?
a. exchange rate risk.
b. size.
d. international diversification.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

22. According to your text, which of the following is not a factor that increases an MNC’s cost of capital?
a. higher exposure to exchange rate risk.
b. higher exposure to country risk.
c. an increase in the risk-free interest rate.
d. an increase in the size of the MNC.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

23. The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower
c. smaller; lower
d. A and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

24. Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

25. Which of the following is not a reason provided in the text regarding why the cost of debt can vary across countries?
a. differences in the risk-free rate.
b. a high price-earnings multiple.
c. differences in the credit risk premium.
d. differences in demographics.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

26. In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.
a. more; low
b. more; high
c. less; low
d. B and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

27. In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.
a. more; strong
b. more; weak
c. less; strong
d. less; weak
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

28. A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
a. debt
b. retained earnings
c. short-term loans
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

29. The ____ the MNC’s cost of capital, the ____ will be a project’s net present value for its proposed project with a given set of expected cash flows.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

30. To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.
a. dependent on; less
b. dependent on; more
c. independent of; less
d. independent of; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

31. In general, a firm ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.
a. more; narrower
b. less; wider
c. more; wider
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

32. According to the CAPM, the required rate of return on stock is a positive function of all of the following, except:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. the company’s earnings.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

33. The lower a project’s beta, the ____ is the project’s ____ risk.
a. lower; systematic
b. lower; unsystematic
c. higher; systematic
d. higher; unsystematic

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

34. Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematic

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

35. Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.
a. higher; MNCs
b. lower; domestic firms
c. lower; MNCs
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

36. When assuming that investors in the U.S. are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC’s project’s beta.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

37. Assume the following information for Pexi Co., a U.S.-based MNC that needs funding for a project in Germany:

U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

What is Pexi’s cost of dollar-denominated equity?
a. 12.0%.
b. 11.2%.
c. 10.0%.
d. 7.2%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

38. Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany:

U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

What is Brama’s after-tax cost of dollar-denominated debt?
a. 7.0%.
b. 4.9%.
c. 8.0%.
d. 5.6%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

39. Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
a. lower than its cost of equity.
b. higher than its cost of equity.
c. lower than the country’s risk-free rate.
d. lower than its credit risk premium.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Comprehension

40. Normally, each subsidiary of an MNC will issue its own stock where it does business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

41. In general, an MNC’s size, its access to international capital markets, and international diversification are unfavorable to an MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

42. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

43. Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of debt in many less developed countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Comprehension

44. In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

45. The MNC’s cost of equity is unrelated to the local risk-free rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

46. Assume a subsidiary is forced to borrow in excess of the MNC’s optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

47. Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

48. Since the cost of funds can vary among markets, the MNC’s access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

49. Capital asset pricing theory would most likely suggest that the MNC’s cost of capital is lower than that of domestic firms.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

50. If an MNC’s cash flows are more stable, it can probably handle more debt than an MNC with erratic cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

51. When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

52. There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

53. An MNC’s cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

54. An MNC’s size, its access to international capital markets, and international diversification are unfavorable to an MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

55. The capital asset pricing model (CAPM) suggests that the required return on a firm’s stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock’s beta.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

56. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Comprehension

57. It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

58. It is probably easier to estimate the cost of equity than it is to estimate the cost of debt.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

59. An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

60. If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent’s subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Comprehension

61. Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.
a. higher; higher
b. lower; higher
c. higher; lower
d. B and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

62. The capital asset pricing model suggests that the required return on a firm’s stock is a positive function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

63. The capital asset pricing model suggests that the required return on a firm’s stock is a negative function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

64. An MNC can obtain equity by all of the following except:
a. retained earnings.
b. a global equity offering.
c. a domestic equity offering.
d. none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

65. Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner’s tax rate is 40%. What is Werner’s weighted average cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Application

66. The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
a. 8.4%
b. 11.4%
c. 10%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

67. Which of the following is least likely to influence an MNC’s capital structure?
a. The stability of MNC’s cash flows
b. The MNC’s credit risk
d. The MNC’s decision to invest excess cash in a Treasury bill rather than in a bank

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

68. Which of the following is not a host country characteristic than can affect an MNC’s capital structure decision?
a. The strength of host country currencies
b. The country risk in host countries
c. Political decisions to increase penalties for criminals
d. Tax laws in host countries

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

69. If the parent ____ the debt of the subsidiary, the subsidiary’s borrowing capacity might be ____.
a. does not back; increased
b. backs; reduced
c. does not back; reduced
d. backs; increased
e. C and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

70. ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
a. Private placements
b. Domestic equity offerings
c. Global equity offerings
d. Global debt offerings

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

71. Most MNCs obtain equity funding:
a. in foreign countries.
b. in their home country.
c. through global offerings.
d. through private placements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

Chapter 18—Long-Term Debt Financing

1. If an MNC financed with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that:
a. exhibits a low interest rate and is expected to appreciate.
b. exhibits a low interest rate and is expected to depreciate.
c. exhibits a high interest rate and is expected to depreciate.
d. exhibits a high interest rate and is expected to appreciate.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

2. Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

3. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
a. invoicing its exports in U.S. dollars.
b. requesting that any imports ordered by the firm be invoiced in U.S. dollars.
c. invoicing its exports in euros.
d. requesting that any imports ordered by the firm be invoiced in the currency denominating the bonds.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

4. Lantana Co. conducts pays for many imports denominated in Canadian dollars. It is a major exporter to France, and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in:
a. U.S. dollars.
b. euros.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

5. Simulation is useful in the bond-denomination decision since it can:
a. precisely compute the cost of financing with bonds denominated in a single foreign currency.
b. precisely compute the cost of financing with bonds denominated in a portfolio of foreign currencies.
c. assess the probability that a bond denominated in a foreign currency will be less costly than a bond denominated in the home currency.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Knowledge

6. An interest rate swap between two firms of different countries enables the exchange of ____ for ____.
a. fixed-rate payments; floating-rate payments
b. stock; interest deductions on taxes
c. interest payments on loans; ownership of debt of less developed countries
d. interest payments on loans; stock

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

7. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
a. a foreign currency; weakens
b. dollars; strengthens
c. a foreign currency; strengthens
d. dollars; weakens

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

8. The yields offered on newly issued bonds tend to be:
a. lower in less developed countries where labor costs are low.
b. relatively high in countries such as Japan and the U.S. because the credit risk premium is much higher there than in other countries.
c. the same across countries at a give point in time.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

9. When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC’s exposure to exchange rate risk can be minimized if:
a. the parent issues dollar-denominated equity and provides the proceeds to the subsidiary.
b. the parent provides its retained earnings to the Mexican subsidiary.
c. the subsidiary obtains a dollar-denominated loan from a financial institution.
d. the subsidiary obtains a peso-denominated loan from a financial institution.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

10. A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:
a. issuing Swiss franc-denominated bonds.
d. issuing U.S. dollar-denominated bonds.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

11. A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business, and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:
a. U.S. dollars.
c. Chinese yuan.
d. a combination of Canadian dollars and Chinese yuan.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

12. If the currency denominating a foreign bond depreciates against the firm’s home currency, the funds needed to make coupon payments will increase.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

13. An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
a. convert to floating-rate debt.
b. hedge exchange rate risk.
c. lock in the interest payments on debt.
d. remove the default risk of its debt.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

14. A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
a. stock; one currency
b. stock; a portfolio of foreign currencies
c. one currency; stock options
d. one currency; another currency

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

15. Assume a U.S.-based subsidiary wants to raise \$1,000,000 by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is \$.02. Thus, the MNC needs ____ rupees to obtain the \$1,000,000 needed.
a. 50,000,000
b. 20,000
c. 1,000,000
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Application

16. An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bonds have a coupon rate of 15%. If the peso remains stable at its current level of \$.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be:
a. 10.0%.
b. 12.5%.
c. 15.0%.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

17. New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000 Russian rubles at par. The bonds have a coupon rate of 17%. If the ruble is expected to appreciate from its current level of \$.03 to \$.032, \$.034, and \$.035 in years 1, 2,and 3, respectively, what is the financing cost of these bonds?
a. 17%.
b. 23.18%.
c. 22.36%.
d. 23.39%.

18. In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ swap, two parties agree to periodically exchange foreign currencies.
a. interest rate; currency
b. currency; interest rate
c. interest rate; interest rate
d. currency; currency

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

19. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:

Fixed Rate Bond Variable Rate Bond
Good Company 10% LIBOR + 1%
Bad Company 12% LIBOR + 1.5%

Given this information:
a. an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
b. an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
c. an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Application

20. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest rates ____ substantially.
a. floating-rate; rise
b. floating-rate; fall
c. fixed-rate; rise
d. fixed-rate; fall
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

21. When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project’s risk is to:
a. apply a required return that is based on the CAPM.
b. apply a required return based on unsystematic risk.
c. derive the net present value of the equity investment.
d. apply the required return equal to the risk-free rate in the foreign country.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

22. Assume that a yield curve’s shape is caused by liquidity. An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is:
a. flat.
b. inverted.
c. upward-sloping.
d. downward sloping.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

23. If the foreign currency that was borrowed appreciates over time, an MNC will need fewer funds to cover the coupon or principal payments. [Assume the MNC has no other cash flows in that currency.]
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

24. U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary’s local currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

25. Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries is ____.
a. low; high
b. high; low
c. high; high
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

26. MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future.
a. forward contracts
b. currency swaps
c. parallel loans
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

27. An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for short-term debt than for long-term debt. The yield curve in this country reflects ____.
a. higher; several periods
b. lower; several periods
c. higher; a specific point in time
d. lower; a specific point in time

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

28. The ____ for a given country represents the annualized yield offered on debt for various maturities.
a. LIBOR
b. yield curve
c. parallel loan
d. interest rate swap

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Knowledge

29. When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.
a. short; interest rate
b. long; interest rate
c. short; exchange rate
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

30. Some MNCs use a country’s yield curve to compare annualized rates among debt maturities, so that they can choose a maturity that has a relatively low rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

31. As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap between two parties.
a. ultraparty
b. broker
c. counterparty
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

32. In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____.
a. fixed; decline
b. floating; decline
c. floating; increase
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

33. In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
a. callable
b. putable
c. amortizing
d. zero-coupon

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

34. In a(n) ____ swap, the notional value is increased over time.
a. amortizing
b. basis
c. zero-coupon
d. accretion

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

35. A ____ gives its owner the right to enter into a swap.
a. basis swap
b. swaption
c. callable swap
d. putable swap

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

36. Foreign subsidiaries of U.S. MNCs can finance projects with dollars in order to avoid exchange rate risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

37. The actual financing cost of a U.S. corporation issuing a bond denominated in euros is affected by the euro’s value relative to the U.S. dollar during the financing period.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

38. A floating coupon rate is an advantage to the bond issuer during periods of increasing interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

39. An MNC issuing pound-denominated bonds may be completely insulated from exchange rate risk associated with the bond if its foreign subsidiary makes the coupon and principal payments of the bond with its pound receivables.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

40. If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros, it would sell euros forward.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

41. Currency swaps, whereby two parties exchange currencies at a specified point in time for a specified price, are often used by MNCs to hedge against interest rate risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

42. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

43. Many MNCs simultaneously swap interest payments and currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

44. A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

45. Since yield curves are identical across countries, MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Knowledge

46. Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

47. If the currency denominating a foreign bond depreciates against the firm’s home currency over the lifetime of the bond, the funds needed to make coupon payments will increase.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

48. Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

49. If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.
a. appreciates; increase
b. depreciates; decrease
c. appreciates; decrease
d. depreciates; increase
e. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

50. Generally, the financing costs associated with a foreign currency-denominated bond will be ____ volatile than the financing costs of a domestic bond because of ____.
a. more; exchange rate movements
b. less; exchange rate movements
c. less; global economic conditions
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

51. ____ swaps are often used by companies to hedge against ____ rate risk.
a. Currency; interest
b. Interest; interest
c. Interest; exchange
d. Currency; exchange
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

52. ____ are commonly used to hedge interest rate risk.
a. Currency swaps
b. Parallel loans
c. Interest rate swaps
d. Forward contracts
e. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

53. In a(n) ____ swap, the notional value is reduced over time.
a. accretion
b. amortizing
c. forward
d. zero-coupon
e. putable

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

54. A(n) ____ swap is entered into today, but the swap payments start at a specific future point in time.
a. accretion
b. amortizing
c. forward
d. zero-coupon
e. putable

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

1. Which of the following is a reason why commercial banks can facilitate international trade?
a. The exporter may not wish to accept credit risk of the importer.
b. The government may impose exchange contracts that prevent payment by the importer to the exporter.
c. The exporter may need financing until payment for the goods is received.
d. All of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

2. Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:
a. accounts receivable financing.
b. consignment.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

3. Consider a bank that acknowledges that it will make payments on behalf of a computer importer after the computers are delivered to the importer. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

4. Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

5. Consider an exporter that is willing to send goods to the importer without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported goods. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

6. The all-in-rate a bank charges its customer(s) for accepting drafts includes both the discount rate and the acceptance commission.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

7. MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash.
a. factoring
c. a banker’s acceptance
d. a letter of credit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

8. The ____ was established in 1934 with the intention to facilitate Soviet-American trade.
a. Domestic International Sales Corporation (DISC)
b. Private Export Funding Corporation (PEFCO)
c. Export-Import Bank
d. Foreign Credit Insurance Association (FCIA)

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

9. A ____ provides a summary of freight charges and conveys title to the merchandise.
a. letter of credit
b. banker’s acceptance
d. bill of exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

10. According to the text, international trade activity has generally ____ over time. This should cause the popularity of trade finance techniques to ____ over time.
a. increased; increase
b. increased; decrease
c. decreased; increase
d. decreased; decrease

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

11. Which of the following payment terms provides the supplier with the greatest degree of protection?
a. letters of credit.
b. consignment.
c. prepayment.
d. drafts (sight/time).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

12. With ____, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
a. a letter of credit arrangement
b. an open account arrangement
c. a draft arrangement
d. a consignment arrangement

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

13. With ____, a bank purchases a receivable without recourse to the exporter.
a. accounts receivable financing
b. factoring
c. a banker’s acceptance
d. a letter of credit

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

14. In ____, a bank arranges to fund a loan to pay the exporter instead of charging the importer’s account immediately.
a. refinancing of a sight letter of credit
b. a banker’s acceptance
c. a short-term bank loan
d. accounts receivable financing

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

15. A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:
a. banker’s acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

16. A bill of exchange requesting the bank to pay the face amount at a future date is a:
a. banker’s acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

17. An exchange of goods between two parties under two distinct contracts expressed in monetary terms is:
a. compensation.
b. counterpurchase.
c. factoring.
d. accounts receivable financing.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

18. Which of the following is not a program of the Export-Import Bank of the U.S.?
a. working capital guarantee program.
b. project finance loan program.
c. direct loan program.
d. the foreign sales corporation program.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

19. Who bears the payment risk in a letter of credit?
a. the exporter.
b. the importer.
c. the issuing bank.
d. both the exporter and importer.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

a. restrictions imposed by the government on imports from another country.
b. restrictions imposed by the government on exports sent from the country.
c. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
d. financing provided to an exporter in exchange for goods provided to the creditor by the exporter.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

21. All types of foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country are called countertrade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

22. The exchange of goods between two parties without the use of any currency as a medium of exchange is called factoring.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

23. A draft drawn on and accepted by a bank is called a banker’s acceptance.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

24. The Direct Loan Program is administered by the:
a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

25. The Working Capital Guarantee Program is administered by the:
a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

26. Which of the following is not a payment method used for international trade?
a. consignment.
b. open account.
c. factoring.
d. draft.
e. letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

27. Under a letter of credit arrangement, the bank issuing the letter of credit is known as the ____ bank, the correspondent bank in the beneficiary’s country to which the issuing bank sends the letter of credit is known as the ____ bank, and the bank that agrees to examine documents under the letter of credit and pay the beneficiary is called the ____ bank.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

28. A(n) ____ letter of credit is not a trade-related letter of credit.
a. commercial
b. import/export
c. revocable
d. irrevocable
e. all of the above are trade-related letters of credit

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

29. Which of the following is not true regarding letters of credit?
a. They are issued by banks on behalf of the importer promising to pay the exporter.
b. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
c. They guarantee that the goods shipped are the goods purchased.
d. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

30. A banker’s acceptance is a draft drawn on and accepted by a(n) ____.
a. bank
b. importer
c. exporter
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

31. Which of the following is not true regarding a banker’s acceptance?
a. It can be beneficial to the exporter, as he does not have to worry about the credit risk of the importer.
b. It can be beneficial to the importer, as he may have greater access to foreign markets when purchasing supplies.
c. It can be beneficial to the bank accepting the draft in that it earns a commission for creating an acceptance.
d. It is a sight draft.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

32. ____ is not a type of program offered by Ex-Imbank.
a. Guarantees
b. Loans
c. Currency swap insurance
d. Bank insurance

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

33. As part of Ex-Imbank’s export credit insurance programs, a(an) ____ policy is generally issued to an administrator, such as a bank, trading company, insurance broker, or government agency, who then administers the policy for multiple exporters.
d. umbrella

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

34. The ____ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ____ is a self-sustaining government agency.
a. Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO)
b. Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC)
c. Private Export Funding Corporation (PEFCO); Ex-Imbank
d. Overseas Private Investment Corporation (OPIC); Ex-Imbank

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

35. The risk to the exporter is highest with the ____ method.
a. prepayment
b. letter of credit
c. consignment
d. open account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

36. A ____ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.
a. draft
d. letter of credit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

37. Under a(n) ____ arrangement, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
a. draft
b. consignment
c. prepayment
d. open account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

38. In ____, the exporter sells accounts receivable without recourse.
a. accounts receivable financing
b. factoring
c. working capital financing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

39. An irrevocable L/C obligates the issuing bank to honor all drawings presented in conformity with the terms of the L/C.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

40. ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
a. A standby L/C
b. A transferable L/C
c. Assignment of proceeds
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

41. The interest rate the bank charges the customer in a banker’s acceptance is referred to as the all-in rate; it entirely consists of the acceptance commission.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

42. ____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder, usually the exporter.
a. Factoring
b. Accounts receivable financing
c. Forfaiting
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

43. The term counterpurchase denotes the exchange of goods between two parties under two distinct contracts expressed in monetary terms.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

44. The Working Capital Guarantee Program and the Medium-term Guarantee Program are offered by the:
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

45. The ____ is a self-sustaining federal agency responsible for insuring direct U.S. investments in foreign countries against the risk of currency inconvertibility, expropriation, and other political risks.
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

46. Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

47. In an open account transaction, the exporter ships the goods to the importer but retains title to the goods until they have been sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

48. When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

49. From a bank’s viewpoint, issuing a letter of credit is analogous to making a loan as far as risk is concerned.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

50. There is an active secondary market for banker’s acceptances.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

51. The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

52. The Working Capital Guarantee Program of the Private Export Funding Corporation (PEFCO) encourages commercial banks to extend short-term export financing to eligible exporters by providing a comprehensive guarantee that covers 100 percent of the loan’s principal and interest.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

53. The objectives of the Export-Import Bank of the United States include the assumption of underlying credit risk and country risk to encourage private lenders to finance export trade and the provision of direct loans to foreign buyers when private lenders are unwilling to do so.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

54. The Overseas Private Investment Corporation (OPIC) is owned by a consortium of commercial banks and industrial companies; it cooperates closely with the Export-Import Bank.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

55. Under prepayment, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

56. A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

57. If shipment is made under a forfaiting draft, the exporter is paid once shipment has been made and the draft is presented to the buyer for payments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

58. In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping documents and the collection of payment.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

59. Under a countertrade arrangement, the exporter ships the goods to the importer while retaining title to the merchandise until it is sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

60. The sale of accounts receivable to a third party for a discount is called factoring.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

61. Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

62. The payment method that affords the supplier the greatest degree of protection is the prepayment method.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

63. A bank issuing a letter of credit on behalf of an importer is obligated to honor the letter of credit regardless of the buyer’s willingness or ability to pay.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

64. If shipment is made under a time draft, the exporter is paid once shipment has been made and the draft is presented to the buyer for payment.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

65. In an open account transaction, the exporter ships the goods to the importer but retains title to the goods until they have been sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

66. When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

67. An irrevocable letter of credit can be cancelled or amended if the beneficiary consents to it.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

68. The bill of exchange serves as a receipt for shipment and a summary of freight charges; most importantly, it conveys title to the merchandise.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

69. Which of the following is not a payment method used for international trade?
a. Supplier credit
b. Bill of exchange
d. Letter of credit
e. All of the above are payment methods used.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

70. Under a ____, the exporter is paid once shipment has been made and the draft is presented to the buyer for payment; under a ____, the exporter provides instructions to the buyer’s bank to release shipping documents against acceptance, by the buyer, of the draft.
a. sight draft; time draft
b. sight draft; banker’s acceptance
c. bill of lading; banker’s acceptance
d. time draft; sight draft

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

71. Which of the following is not a trade financing method used in international trade from an exporter’s perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

72. Of all the payment methods available in international trade, ____ probably affords the most protection to the exporter, while ____ probably affords the least protection.
a. prepayment; consignment
b. prepayment; open account
c. open account; prepayment
d. consignment; prepayment

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

73. Which of the following is not true regarding letters of credit?
a. They are issued by banks on behalf of the importer promising to pay the exporter.
b. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
c. They guarantee that the goods shipped are the goods purchased.
d. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

Chapter 20—Short-Term Financing

1. MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:
a. have future cash inflows in that foreign currency.
b. have future cash outflows in that foreign currency.
c. have offsetting future cash inflows and outflows in that foreign currency.
d. have no other cash flows in that foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

2. Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:
a. 8%.
b. 14.48%.
c. 2%.
d. 1.52%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

3. Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____ in order to have the same effective financing rate from borrowing dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

4. When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____.
a. foreign currency’s interest rate; appreciates
b. foreign currency’s interest rate; depreciates
c. domestic interest rate; depreciates
d. domestic interest rate; appreciates

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

5. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
a. borrowing domestically.
b. borrowing a portfolio of foreign currencies that are not highly correlated.
c. borrowing a portfolio of foreign currencies that are highly correlated.
d. borrowing two foreign currencies that are negatively correlated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

6. If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio’s effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.
a. high; low
b. high; high
c. low; low
d. low; high

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

7. Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound’s forward rate of \$1.75 equals the pound’s spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower financing cost by borrowing pounds for one year.
a. does; could
b. does; could not
c. does not; could not
d. does not; could

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

8. A risk-averse firm would prefer to borrow ____ when the expected financing costs are similar in a foreign country as in the local country.
a. locally
b. in the foreign country
c. either A or B
d. part of the funds locally, and part from the foreign country

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Knowledge

9. A firm forecasts the euro’s value as follows for the next year:

Possible
Percentage Change Probability
−2% 10%
3% 50%
6% 40%

The annual interest rate on the euro is 7%. The expected value of the effective financing rate from a U.S. firm’s perspective is about:
a. 8.436%.
b. 10.959%.
c. 11.112%.
d. 11.541%.

PTS: 1 DIF: DIFF.03 Challenging OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

10. The effective financing rate:
a. adjusts the nominal interest rate for inflation over the period of concern.
b. adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern.
c. adjusts the nominal rate for a change in foreign interest rates over the period of concern.
d. adjusts the nominal rate for the forward discount (or premium) over the period of concern.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

11. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:
a. less than the domestic interest rate.
b. greater than the domestic interest rate.
c. equal to the domestic interest rate.
d. greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

12. If interest rate parity exists, transactions costs are zero, and the forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency:
a. would be equal to the U.S. interest rate.
b. would be less than the U.S. interest rate.
c. would be more than the U.S. financing rate.
d. would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

13. Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:
a. on average, the foreign effective financing rate is greater than the domestic interest rate.
b. on average, the foreign effective financing rate is less than the domestic rate.
c. the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium.
d. the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

14. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year forward rate of the pound is \$1.97. The spot rate of the pound at the beginning of the year is \$1.95. By the end of the year, the pound’s spot rate is \$2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

15. The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.
a. lower; low
b. lower; high
c. higher; high
d. higher; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

16. Euronotes are underwritten by:
a. European central banks.
b. commercial banks.
c. the International Monetary Fund.
d. the Federal Reserve System.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

17. Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ\$ is \$.52, and the one-year forward rate of the NZ\$ is \$.50. At the end of the year, the spot rate is \$.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ\$ loan?

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

18. A negative effective financing rate for a U.S. firm implies that the firm:
a. will incur a loss on the project financed with the funds.
b. paid more interest on the funds than what it would have paid if it had borrowed dollars.
c. will be unable to repay the loan.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

19. A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today’s spot rate as a forecast for the franc’s spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:
a. equal to the U.S. interest rate.
b. less than the U.S. interest rate, but more than the Swiss interest rate.
c. equal to the Swiss interest rate.
d. less than the Swiss interest rate.
e. more than the U.S. interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

20. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been:
a. negative.
b. zero.
c. positive, but lower than the interest rate of their respective countries.
d. higher than the interest rate of their respective countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

21. ____ typically have maturities of less than one year.
a. Eurobonds
b. Euro-commercial paper
c. Euronotes

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

22. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.
a. payables; euros
b. receivables; euros
c. payables; dollars
d. receivables; dollars

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

23. Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is \$.25. If the spot rate of the ringgit in one year is \$.28, the dollar amount initially obtained from the loan is \$____, and \$____ are needed to repay the loan.
a. 375,000; 449,400
b. 449,400; 375,000
c. 6,000,000; 5,357,143
d. 5,357,143; 6,000,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

24. Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is \$.005. If the spot rate of the yen at maturity of the loan is \$.0035, what is the effective financing rate of borrowing yen?
a. 37.8%.
b. 51.43%.
c. −25.8%.
d. −6%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

25. ____ are free of default risk.
a. Euronotes
b. Eurobonds
c. Euro-commercial paper
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8% for one year. Also assume that the spot rate of the leu is \$.00012 and the one-year forward rate of the leu is \$.00010. The expected spot rate of the leu one-year from now is \$.00011.

26. Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?
a. 10%.
b. −10%.
c. −1%.
d. 1%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

27. Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

28. Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?
a. 6%.
b. 7%.
c. 1%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

29. Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:

Percentage Change Probability of Occurrence
−5% 20%
−3% 50%
1% 30%

If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is:
a. 27.14%.
b. 32.86%.
c. 26.10%.
d. none of the above

Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C\$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:

Currency Percentage Change Probability

Japanese yen −3.0% 60%
Japanese yen 1.0% 40%

30. Refer to Exhibit 20-2. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
a. 9.03%.
b. 7.00%.
c. 10.00%.
d. 7.59%.
e. none of the above

31. Refer to Exhibit 20-2. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?
a. 12%.
b. 30%.
c. 100%.
d. 0%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:

Mean effective financing rate of Japanese yen for six months 4%
Mean effective financing rate of Sudanese dinar for six months 1%
Standard deviation of Japanese yen’s effective financing rate .10
Standard deviation of Sudanese dinar’s effective financing rate .20
Correlation coefficient of effective financing rates of these two currencies .23

32. Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated by Cameron Corporation?
a. 3.10%.
b. 1.90%.
c. 17.00%.
d. 13.00%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

33. Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron?
a. 2.24%.
b. 14.98%.
c. 2.89%.
d. 17.00%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

34. If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

35. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

36. Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

37. One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

38. A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

39. If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Knowledge

40. The interest rate of euronotes is based on the T-bill rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

41. Countries with a ____ rate of inflation tend to have a ____ interest rate.
a. high; low
b. low; high
c. high; high
d. A and B are correct

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

42. Kushter Inc. would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter’s effective financing rate next year?
a. 1.92%
b. 2.00%
c. 6.08%
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

43. A negative effective financing rate indicates that an MNC:
a. paid only a small amount in interested over and above the amount borrowed.
b. has been negatively affected by a large appreciation of the foreign currency.
c. actually paid fewer dollars to repay the loan than it borrowed.
d. would have been better off borrowing in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

44. If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
a. lower than
b. greater than
c. similar to
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

45. If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate.
a. lower than
b. greater than
c. similar to
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: B | Bloom’s: Comprehension

46. Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.
a. appreciate by 0.92%.
b. depreciate by 0.92%.
c. appreciate by 1.00%.
d. depreciate by 1.00%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

47. Foreign financing costs in a single foreign currency ____ financing costs in dollars, and the variance of foreign financing costs over time is ____ than the variance of financing in dollars.
a. are higher than; higher than
b. can be lower or higher than; higher than
c. can be lower or higher than; lower than
d. are lower than; higher than

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

48. The degree of volatility of financing with a currency portfolio depends on only the standard deviations of effective financing rates of the individual currencies within the portfolio.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

49. An MNC’s parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

50. A large firm may finance in a foreign currency to offset a net payable position in that foreign country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Knowledge

51. If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

52. Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?
a. Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan.
b. Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan.
c. A U.S. firms has net receivables in Cyprus pounds.
d. A and C.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Analysis

53. Which of the following statement is false?
a. If interest rate parity holds, foreign financing a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing.
b. If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing.
c. If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.
d. If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

54. If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing
b. discount; higher than
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

55. Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.
a. depreciates; 3.54
b. appreciates; 3.54
c. depreciates; 3.67
d. appreciates; 3.67

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

Chapter 21—International Cash Management

1. The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest rate is 9 percent. If a U.S. firm creates a one-year deposit in Mexico, the Mexican peso would have to ____ against the U.S. dollar by ____ in order to make that investment have an effective yield that is achievable in the U.S.
a. appreciate; 18%
b. depreciate; 36%
c. depreciate; 14%
d. appreciate; 14%
e. depreciate; 8.5%

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

2. Assume that Subsidiaries X and Y often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help out Subsidiary Y?
a. X should lag its payments sent to Y to pay for imports from Y.
b. X should request that Y lead its payments to be sent for goods that Y sent to X.
c. A and B
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Application

3. Netting can achieve all but one of the following:
a. Cross border transactions between subsidiaries are reduced.
b. Transactions costs are reduced.
c. Currency conversion costs are reduced.
d. Transaction exposure is eliminated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

4. Which of the following is true?
a. Some countries may prohibit netting.
b. Some countries may prohibit forms of leading and lagging.
c. A and B
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

5. According to the text:
a. banks in the U.S. are prohibited from facilitating cash transfers for MNCs.
b. banks in most non-U.S. countries are more advanced than the U.S. in facilitating cash transfers for MNCs.
c. an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

6. In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

7. Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even level of depreciation in the euro at which the U.S. and French investments would exhibit the same return to a U.S. investor is:

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

8. Assume that a U.S. investor invests in a British CD offering a six-month interest rate of 5%. Over this six-month period, the pound depreciates by 9%. The effective yield on the British CD for the U.S. investor is:
a. 14.45%.
b. −4.45%.
c. 14.00%.
d. −4.00%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

9. Assume that there are several foreign currencies that exhibit a higher interest rate than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher effective yield on a portfolio of currencies (relative to the domestic yield) if:
a. the foreign currency movements against the U.S. dollar are highly correlated.
b. the foreign currency movements against the U.S. dollar are perfectly positively correlated.
c. the foreign currency movements against the U.S. dollar exhibit low correlations.
d. none of the answers above would have any impact on the probability of a foreign cash investment generating a higher effective yield than a U.S. investment.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

10. If the international Fisher effect (IFE) exists, then a U.S. firm that has access to banks offering high interest rates in deposits denominated in foreign currencies should:
a. invest in the foreign deposits since they will, on average, generate higher effective yields than a U.S. deposit.
b. invest in the U.S. deposits since they will, on average, generate higher effective yields than a foreign deposit.
c. invest in the U.S. deposits since they will, on average, generate similar effective yields as a foreign deposit.
d. invest in the foreign deposits since they will, on average, generate similar effective yields as a U.S. deposit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

11. The most useful measure of an MNC’s liquidity is its:
a. cash balance.
b. amount of securities held as investments.
c. political risk rating.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

12. Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the international Fisher effect will also hold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

13. According to the international Fisher effect:
a. exchange rates adjust to compensate for income differentials between countries.
b. interest rates adjust to compensate for income differentials between countries.
c. exchange rates adjust to compensate for interest rate differentials between countries.
d. exchange rates adjust to compensate for risk differentials between countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

14. The international Fisher effect suggests that:
a. the effective yield on short-term foreign securities should, on average, equal the yield on short-term domestic securities.
b. the effective yield on short-term securities of high inflation countries is greater than the yield on short-term domestic securities.
c. if domestic income grows faster than foreign income, the effective yield on short-term foreign securities is higher than short-term domestic securities.
d. if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

15. If a foreign currency consistently depreciated against the dollar over several periods and had lower interest rates at the beginning of those periods than the U.S. interest rates, then:
a. U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those periods.
b. the international Fisher effect is supported by the results.
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

16. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

17. A common purpose of inter-subsidiary leading or lagging strategies is to:
a. allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds.
b. assure that the inventory levels at subsidiaries are maintained within tolerable ranges.
c. change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary.
d. measure the performance of subsidiaries according to how quickly subsidiaries remit dividend payments to the parent.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

18. Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these securities is 12%, while the interest rate on the same securities in the U.S. is 10%. The firm believes that today’s spot rate is an appropriate forecast for the spot rate of the pound in one year. Based on this information, the effective yield on British securities from the U.S. firm’s perspective is:
a. equal to the U.S. interest rate.
b. equal to the British interest rate.
c. lower than the U.S. interest rate.
d. higher than the British interest rate.
e. lower than the British interest rate, but higher than the U.S. interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

19. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:
a. negative.
b. zero.
c. positive, but less than the interest rate of their respective countries.
d. more than the interest rate of their respective countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

20. According to ____, the effective yield earned by U.S. investors will be the same as the effective yield earned by non-U.S. investors in any given period.
a. interest rate parity (IRP)
b. the international Fisher effect (IFE)
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

21. Assume Costner Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9%. At the time the loan is extended, the spot rate of the kwacha is \$.00060. If the spot rate of the kwacha in one year is \$.00056, the dollar amount initially invested in Zambia is \$____, and \$____ are paid out after one year.
a. 1,500; 1,526
b. 1,526; 1,500
c. 1,500; 1,400
d. 1,400; 1,500

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

22. Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is \$.205. If the spot rate of the rand at maturity of the investment is \$.203, what is the effective yield of investing in rand?
a. 11.08%.
b. 8.92%.
c. 10.00%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

23. Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the deposit is covered by a forward sale of dollars.
a. 10%.
b. 8%.
c. 2%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

24. Assume that you forecast the value of the euro as follows for the next year:

Percentage Change Probability of Occurrence
−2% 30%
3% 40%
5% 30%

If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:
a. 15.36%.
b. 15.70%.
c. 12.00%.
d. 14.35%.
e. none of the above

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50% of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8%. The Trinidad one-year interest rate is 10% and the Japanese one-year interest rate is 7%. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:

Currency Percentage Change Probability

Japanese yen −2.0% 45%
Japanese yen 1.0% 55%

25. Refer to Exhibit 21-1. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?
a. 6.47%.
b. 8.84%.
c. 8.50%.
d. none of the above

26. Refer to Exhibit 21-1. What is the probability that the yield of the two-currency portfolio is less than the domestic yield?
a. .1575.
b. .35.
c. .6425.
d. 1.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

Exhibit 21-2
Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR) and Romanian leu (ROL) for a three-month period. Moore would like to determine the expected yield and the variance of a portfolio consisting of 40% ringgit and 60% leu. Moore has identified the following information:

Mean effective financing rate of Malaysian ringgit for three months 3%
Mean effective financing rate of Romanian leu for three months 2%
Standard deviation of Malaysian ringgit’s effective financing rate .15
Standard deviation of Romanian leu’s effective financing rate .07
Correlation coefficient of effective financing rates of these two currencies .19

27. Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?
a. 2.50%.
b. 2.60%.
c. 2.40%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

28. Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by Moore Corporation?
a. .624%.
b. 7.950%.
c. 1.040%.
d. 10.200%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

29. Lockboxes are post office box numbers assigned to employees for picking up their paychecks.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

30. Preauthorized payment is an arrangement that allows a corporation to charge a customer’s bank account up to some limit.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

31. Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

32. Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

33. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

34. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.01
KEY: Bloom’s: Comprehension

35. A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.01
KEY: Bloom’s: Knowledge

36. To ____, MNCs can use preauthorized payments.
a. accelerate cash inflows
b. minimize currency conversion costs
c. manage blocked funds
d. manage intersubsidiary cash transfers

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

37. ____ may complicate cash flow optimization.
a. The use of a zero-balance account
b. Government restrictions
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

38. MNCs often use ____ to invest excess cash while retaining liquidity.
a. international bond markets
b. international equity markets
c. international money markets
d. the market for acquisitions

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

39. Centralized cash management is more complicated when the MNC uses multiple currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

40. In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

41. Since each subsidiary may be more concerned with its own operations than with the overall operations of the MNC, a centralized management group may need to monitor the parent-subsidiary and intersubsidiary cash flows.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Comprehension

42. A currency portfolio’s variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

43. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

44. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

45. The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.
a. inflation rate; exchange rate movements
b. income level; interest rates
c. interest rates; exchange rate movements
d. interest rates; amount invested

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

46. Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is \$0.205. If the spot rate of the rand at maturity of the investment is \$0.203, what is the effective yield of investing in rand?
a. 11.08%
b. 8.93%
c. 10.00%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

47. Which of the following statements is false?
a. If interest rate parity exists, covered interest arbitrage is not worthwhile.
b. If interest rate parity holds and the forward rate is an accurate forecast of the future spot rate, an uncovered investment in a foreign security is not worthwhile.
c. If interest rate parity exists and the forward rate is an unbiased forecast of the future spot rate, an uncovered investment in a foreign security will on average earn an effective yield similar to an investment in a domestic security.
d. If interest rate parity exists and the forward rate is expected to underestimate the future spot rate, an uncovered investment in a foreign security is expected to earn a lower effective yield than an investment in a domestic security.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

48. If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage is feasible for investors residing in the ____ country.
b. discount; home
d. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

49. Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.
a. depreciates; 1.77
b. appreciates; 1.74
c. appreciates; 1.77
d. depreciates; 1.74

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

50. Which of the following is not a technique to optimize cash flows?
a. Accelerate cash inflows
b. Minimize currency conversion costs
c. Manage blocked funds
d. All of the above are techniques to optimize cash flows

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

51. A ____ allows customers to send payments to a post office box number.
a. bilateral netting system
b. multilateral netting system
c. lockbox
d. preauthorized payment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

# FIN 535 Week 11 Final Exam – Strayer University New

FIN/535 Week 11 Final Exam – Strayer New

http://budapp.net/FIN-535-Final-Exam-Week-11-Strayer-NEW-FIN535W11E.htm

Chapters 8 Through 21

Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates

1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
a. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
b. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
c. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
d. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.

2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
a. a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

3. The international Fisher effect (IFE) suggests that:
a. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

5. Because there are sometimes no substitutes for traded goods, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

6. According to the IFE, if British interest rates exceed U.S. interest rates:
a. the British pound’s value will remain constant.
b. the British pound will depreciate against the dollar.
c. the British inflation rate will decrease.
d. the forward rate of the British pound will contain a premium.
e. today’s forward rate of the British pound will equal today’s spot rate.

7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:
a. the nominal interest rates of both countries are the same.
b. the inflation rates of both countries are the same.
c. the exchange rates of both countries will move in a similar direction against other currencies.
d. none of the above

8. Given a home country and a foreign country, purchasing power parity suggests that:
a. the inflation rates of both countries will be the same.
b. the nominal interest rates of both countries will be the same.
c. A and B
d. none of the above

9. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. the value of the euro would often appreciate against the dollar.
b. the value of the euro would often depreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

10. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
b. some corporations with excess cash could have generated profits on average from covered interest arbitrage.
c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.

11. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:
a. the income differential.
b. the forward discount or premium.
c. the inflation differential.
d. none of the above

12. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
a. 2%.
b. 3%.
c. −2%.
d. 5%.
e. 8%.

13. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
a. follows their exchange rate movement.
b. is due to their inflation differentials.
c. is zero.
d. is constant over time.
e. C and D

14. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.
a. 2 percentage points above; depreciate by about 2%
b. 3 percentage points above; depreciate by about 3%
c. 3 percentage points below; appreciate by about 3%
d. 3 percentage points below; depreciate by about 3%
e. 2 percentage points below; appreciate by about 2%

15. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.
a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%

16. Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
a. lower U.S. inflation; depreciate
b. lower U.S. inflation; appreciate
c. higher U.S. inflation; depreciate
d. higher U.S. inflation; appreciate

17. According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.
a. lower; strengthen
b. lower; weaken
c. higher; weaken
d. higher; strengthen

18. If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.
a. greater than
b. less than
c. equal to
d. answer is dependent on whether the forward rate has a discount or premium

19. The Fisher effect is used to determine the:
a. real inflation rate.
b. real interest rate.
c. real spot rate.
d. real forward rate.

20. Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:
a. interest rate parity.
b. locational arbitrage.
d. the exchange rate mechanism.

21. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.
a. appreciate; 4.85
b. depreciate; 3,11
c. appreciate; 3.11
d. depreciate; 4.85

22. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is \$0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:
a. \$0.0076.
b. \$0.0073.
c. \$0.0070.
d. \$0.0066.

23. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; appreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

24. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 2. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

25. Which of the following is indicated by research regarding purchasing power parity (PPP)?
a. PPP clearly holds in the short run.
b. Deviations from PPP are reduced in the long run.
c. PPP clearly holds in the long run.
d. There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

26. The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is \$1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:
a. \$1.47.
b. \$1.53.
c. \$1.43.
d. \$1.57.

27. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____ by about ____%, according to the international Fisher effect (IFE).
a. depreciate; 2.9
b. appreciate; 2.9
c. depreciate; 1.0
d. appreciate; 1.0
e. none of the above

28. There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect.
a. True
b. False

29. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

30. The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
a. True
b. False

31. According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

32. Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.
a. True
b. False

33. The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.
a. True
b. False

34. If the IFE theory holds, that means that covered interest arbitrage is not feasible.
a. True
b. False

35. If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.
a. True
b. False

36. Interest rate parity can only hold if purchasing power parity holds.
a. True
b. False

37. If interest rate parity holds, then the international Fisher effect must hold.
a. True
b. False

38. Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

39. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

40. Which of the following theories can be assessed using data that exists at one specific point in time?
b. international Fisher effect (IFE).
c. A and B
d. interest rate parity (IRP).

41. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
a. absolute form of PPP.
b. relative form of PPP.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

42. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 1. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

43. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

44. Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound’s spot exchange rate should ____ by about ____ over the year.
a. depreciate; 1.9%
b. appreciate; 1.9%
c. depreciate; 3.94%
d. appreciate; 3.94%

45. According to the international Fisher effect (IFE):
a. the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
b. the exchange rate adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
c. the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
d. the percentage change in the foreign spot exchange rate will be negative if foreign interest rate is lower than the local interest rate.

46. Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have \$100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro’s spot exchange rate is \$1.40. What will be the yield on your investment if you invest in euros?
a. 8%
b. 5%
c. 3%
d. 2.78%

47. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have \$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is \$0.689. What will be the yield on your investment if you invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%

48. Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?
a. real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
b. real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
c. real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
d. IFE doesn’t hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.

49. The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.
a. True
b. False

50. If purchasing power parity holds, then the Fisher effect must also hold.
a. True
b. False

51. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets.
a. True
b. False

52. Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one-year put option for \$.03 per unit on Australian dollars at a strike price of \$0.72. Today the Australian dollar is quoted at \$0.70. You believe that purchasing power parity holds. You should accept the offer.
a. True
b. False

53. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.
a. 3.43%
b. 5.68%
c. 6.5%
d. 7.3%

54. Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.
a. True
b. False

55. According to the international fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

56. According to purchasing power parity (PPP), if a foreign country’s inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.
a. True
b. False

57. According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.
a. True
b. False

58. The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is \$0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be
a. \$0.0078.
b. \$0.0082.
c. \$0.0111.
d. \$0.00492.
e. None of the above

59. Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; depreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

60. The following regression was conducted for the exchange rate of the Cyprus pound (CYP):

Regression results indicate that a0 = 0 and a1 = 2. Therefore,
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the Cyprus pound in the future.

61. Among the reasons that purchasing power parity (PPP) does not consistently occur are:
a. exchange rates are affected by interest rate differentials.
b. exchange rates are affected by national income differentials and government controls.
c. supply and demand may not adjust if no substitutable goods are available.
d. all of the above are reasons that PPP does not consistently occur.

62. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

Chapter 9—Forecasting Exchange Rates

1. Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

2. Which of the following forecasting techniques would best represent sole use of today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

3. Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

4. Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro’s future currency value?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

5. If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
a. underestimated the future exchange rates over time.
b. overestimated the future exchange rates over time.
c. forecasted future exchange rates accurately.
d. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

6. According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:
a. currencies exhibited about the same mean forecast errors as a percent of the realized value.
b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies.
c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

7. Assume the following information:

Predicted Value of Realized Value of
Period New Zealand Dollar New Zealand Dollar
1 \$.52 \$.50
2 .54 .60
3 .44 .40
4 .51 .50

Given this information, the mean absolute forecast error as a percentage of the realized value is about:
a. 1.5%.
b. 26%.
c. 6%.
d. 6.5%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

8. If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.
a. technical forecast technique
b. fundamental forecast technique
c. all of the above
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

9. Which of the following is true?
a. Forecast errors cannot be negative.
b. Forecast errors are negative when the forecasted rate exceeds the realized rate.
c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

10. Which of the following is true according to the text?
a. Forecasts in recent years have been very accurate.
b. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
c. Forecasting errors are smaller when focused on longer term periods.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

11. A fundamental forecast that uses multiple values of the influential factors is an example of:
a. sensitivity analysis.
b. discriminant analysis.
c. technical analysis.
d. factor analysis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

12. When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):
a. lagged input.
b. instantaneous input.
c. simultaneous input.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

13. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

14. Which of the following is not a limitation of fundamental forecasting?
a. uncertain timing of impact.
b. forecasts are needed for factors that have a lagged impact.
c. omission of other relevant factors from the model.
d. possible change in sensitivity of the forecasted variable to each factor over time.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

15. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today’s spot rate of the Mexican peso is \$.20. What is the approximate five-year forecast of the peso’s spot rate if the five-year forward rate is used as a forecast?
a. \$.131.
b. \$.226.
c. \$.262.
d. \$.140.
e. \$.174.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

16. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today’s spot rate of the Canadian dollar is \$.80. The spot rate forecasted for one year ahead is:
a. \$.860.
b. \$.848.
c. \$.740.
d. \$.752.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

17. If today’s exchange rate reflects all relevant public information about the euro’s exchange rate, but not all relevant private information, then ____ would be refuted.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

18. According to the text, research generally supports ____ in foreign exchange markets.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

19. Assume that the U.S. interest rate is 11 percent, while Australia’s one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
a. depreciation in the Australian dollar’s value over the next year.
b. appreciation in the Australian dollar’s value over the next year.
c. no change in the Australian dollar’s value over the next year.
d. information on future interest rates is needed to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

20. If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:
a. covered interest arbitrage is feasible.
b. the international Fisher effect (IFE) is supported.
c. the international Fisher effect (IFE) is refuted.
d. the average absolute error from forecasting would equal zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

21. Which of the following is not a forecasting technique mentioned in your text?
a. accounting-based forecasting.
b. technical forecasting.
c. fundamental forecasting.
d. market-based forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

22. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is:
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

23. The following regression model was estimated to forecast the value of the Indian rupee (INR):

INRt = a0 + a1INTt + a2INFt − 1 + t,

where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = −.5; and a2 = .8. Assume that INFt − 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
30% −2%
40% −3%
30% −4%

The expected change in the Indian rupee in period t is:
a. 3.40%.
b. 0.40%.
c. 3.10%.
d. 1.70%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

24. Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A\$). Listed below are the forecasted and realized values for the last period:

Currency Forecasted Value Realized Value
Australian dollar \$.60 \$.55
Japanese yen \$.0067 \$.0069

According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.
a. more accurate than
b. less accurate than
c. more biased than
d. the same as

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

25. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the pound in year t and Ft − 1 is the forward rate of the pound in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

26. Which of the following is not a method of forecasting exchange rate volatility?
a. using the absolute forecast error as a percentage of the realized value.
b. using the volatility of historical exchange rate movements as a forecast for the future.
c. using a time series of volatility patterns in previous periods.
d. deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

27. If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.
a. weaken; delay
b. weaken; expedite
c. appreciate; expedite
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

28. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.
a. appreciate; depreciate
b. appreciate; appreciate
c. depreciate; depreciate
d. depreciate; appreciate

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

29. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.
a. depreciate by .8%; today
b. depreciate by .8%; tomorrow
c. appreciate by .8%; today
d. appreciate by .8%; tomorrow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

30. Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

31. Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:

eurot = b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1

The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.
a. appreciation; 3.4
b. depreciation; 3.4
c. appreciation; 0.7
d. appreciation; 1.2

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

32. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is \$1.03. Using purchasing power parity, the expected spot rate at the end of one year is \$____.
a. 1.02
b. 1.03
c. 1.04
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

33. If the one-year forward rate for the euro is \$1.07, while the current spot rate is \$1.05, the expected percentage change in the euro is ____%.
a. 1.90
b. 2.00
c. −1.87
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

34. If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.
a. spot; high
b. spot; low
c. forward; high
d. forward; low

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

35. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and spot rate will provide ____ forecasts.
a. substantial; similar
b. substantial; very different
c. close to zero; similar
d. close to zero; very different

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

36. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.
a. technical
b. fundamental
c. market-based
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

37. Silicon Co. has forecasted the Canadian dollar for the most recent period to be \$0.73. The realized value of the Canadian dollar in the most recent period was \$0.80. Thus, the absolute forecast error as a percentage of the realized value was ____%.
a. 9.6
b. −9.6
c. 8.8
d. −8.8

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

38. The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.
a. lower; volatile
b. higher; stable
c. lower; stable
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

39. If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

40. Foreign exchange markets are generally found to be at least ____ efficient.
a. weak-form
b. semistrong-form
c. strong form
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

41. MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

42. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

43. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

44. A regression analysis of the Australian dollar value on the inflation differential between the U.S. and Australia produced a coefficient of .8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by .8%.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

45. The most sophisticated forecasting techniques provide consistently accurate forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

46. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

47. Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

48. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

49. The closer graphical points are to the perfect forecast line, the better is the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

50. Foreign exchange markets appear to be strong-form efficient.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

51. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

52. Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate’s implied standard deviation from the currency option pricing model.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

53. Market-based forecasting involves the use of historical exchange rate data to predict future values.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

54. Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

55. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

56. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

57. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

58. If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today’s exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

59. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

60. The potential forecast error is larger for currencies that are more volatile.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

61. A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

62. In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

63. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.
a. higher; to hedge
b. lower; not to hedge
c. higher; not to hedge
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

64. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

65. The following is not a limitation of technical forecasting:
a. It’s not suitable for long-term forecasts of exchange rates.
b. It doesn’t provide point estimates or a range of possible future values.
c. It cannot be applied to currencies that exhibit random movements.
d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

66. The following regression model was estimated to forecast the percentage change in the Australian Dollar (AUD):

AUDt = a0 + a1INTt + a2INFt − 1 + t,

where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = −.8; and a2 = .5. Assume that INFt − 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
20% −3%
80% −4%

There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.
a. 4.5%; 6.1%;
b. 6.1%; 4.5%
c. 4.5%; 5.3%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

67. Purchasing power parity is used in:
a. technical forecasting.
b. fundamental forecasting.
c. market-based accounting.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

68. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.
b. higher; sell; downward
c. higher; sell; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

69. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.
a. lower; sell; upward
b. lower; sell; downward
c. higher; sell; upward
d. higher; sell; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

70. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
a. appreciation of yen’s value over the next year.
b. depreciation of yen’s value over the next year.
c. no change in yen’s value over the next year.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

71. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
a. appreciation of pound’s value over the next year.
b. depreciation of pound’s value over the next year.
c. no change in pound’s value over the next year.
d. not enough information to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

72. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

73. If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:
a. weak-form efficient.
b. semistrong-form efficient.
c. strong-form efficient.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

74. Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the yen in year t and Ft − 1 is the forward rate of the yen in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

75. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is \$.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
a. \$.840
b. \$.890
c. \$.856
d. \$.854

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

76. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?
a. to decide in which foreign market to invest the excess cash.
b. to decide where to borrow at the lowest cost.
c. to determine whether to require the subsidiary to remit the funds or invest them locally.
d. to speculate on the exchange rate movements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

77. Sensitivity analysis allows for all of the following except:
a. accountability for uncertainty.
b. focus on a single point estimate of future exchange rates.
c. development of a range of possible future values.
d. consideration of alternative scenarios.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

78. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

79. A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the U.S. and Canada was −0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
a. increases; increases
b. decreases; increases
c. increases; decreases
d. increases; decreases

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

80. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

81. Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

82. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

83. Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

84. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

85. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and spot rate will provide similar forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

86. Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

87. Forecast errors tend to be large for short forecast horizons.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

88. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

89. Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of \$0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:
a. \$0.023.
b. \$0.021.
c. \$0.020.
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

90. Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.
a. appreciate; 16.22
b. depreciate; 16.22
c. appreciate; 6.66
d. depreciate; 6.66
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

91. The one-year forward rate of the British pound is \$1.55, while the current spot rate is \$1.60. Based on the forward rate, what is the expected percentage change in the British pound over the next year?
a. +5.0%
b. −3.1%
c. +3.1%
d. +3.2%
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

92. Which of the following is not a method of forecasting exchange rate volatility?
a. Using the absolute forecast error as a percentage of the realized value to improve your forecast.
b. Using the volatility of historical exchange rate movements as a forecast for the future.
c. Using a time series of volatility patterns in previous periods.
d. Deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1. Translation exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

2. Transaction exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

3. Economic exposure refers to:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.
e. the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
a. Diz Co.
b. Yanta Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co.
b. Kriner Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

6. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

7. Which of the following operations benefits from appreciation of the firm’s local currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
b. receiving earnings dividends from foreign subsidiaries.
c. purchasing supplies locally rather than overseas.
d. exporting to foreign countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

8. Which of the following operations benefit(s) from depreciation of the firm’s local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

9. Economic exposure can affect:
a. MNCs only.
b. purely domestic firms only.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

10. Under FASB 52:
a. translation gains and losses are included in the reported net income.
b. translation gains and losses are included in stockholder’s equity.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

11. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of \$1 million cash outflows in francs and the equivalent of \$1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.
a. strong dollar; favorably
b. weak dollar; not
c. strong dollar; not
d. weak dollar; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

12. A U.S. MNC has the equivalent of \$1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.
a. weak; somewhat stable
b. weak; favorably affected
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

13. Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about \$.40 while the present exchange rate of the DK is \$.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. not; stronger
c. favorably; weaker
d. not; weaker
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

15. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.
a. favorably; favorably affected but by a smaller degree
b. favorably; favorably affected by a higher degree
c. unfavorably; favorably affected
d. favorably; unfavorably affected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm’s local currency should:
a. increase local sales as it reduces foreign competition in local markets.
b. increase the firm’s exports denominated in the local currency.
c. increase the returns earned on the firm’s foreign bank deposits.
d. increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm’s local currency should:
a. decrease local sales as foreign competition in local markets is reduced.
b. decrease the firm’s exports denominated in the local currency.
c. decrease the returns earned on the firm’s foreign bank deposits.
d. decrease the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

18. If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against the dollar on ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPt) and the percentage change in the peso’s value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod.
a. negative; positive
b. positive; positive
c. positive; negative
d. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Analysis

20. A set of currency cash inflows is more volatile if the correlations are low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

21. Which of the following is not a form of exposure to exchange rate fluctuations?
a. transaction exposure.
b. credit exposure.
c. economic exposure.
d. translation exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

22. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A\$1,000,000, while Subsidiary B has net outflows in Australian dollars of A\$1,500,000. The expected exchange rate of the Australian dollar is \$.55. What is the net inflow or outflow as measured in U.S. dollars?
a. \$500,000 outflow.
b. \$500,000 inflow.
c. \$275,000 inflow.
d. \$275,000 outflow.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

23. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is \$1.05.
a. \$3,675,000 outflow
b. \$525,000 outflow
c. \$525,000 inflow
d. \$210,000 outflow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

24. One argument for exchange rate irrelevance is that:
a. MNCs can hedge exchange rate exposure much more effectively than individual investors.
b. investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
c. purchasing power parity does not hold very well.
d. MNCs are typically not diversified across numerous countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

25. ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
a. Transaction
b. Economic
c. Translation
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

26. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC’s transaction exposure is relatively ____.
a. negatively; high
b. negatively; low
c. positively; low
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

27. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs’ transaction exposure is ____ if the two currencies are ____ correlated.
a. high; positively
b. low; negatively
c. high; negatively
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).

28. Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?
a. −0.5%
b. −2.2%
c. −1.5%
d. −1.2%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

29. Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is \$1.01.
a. −\$75,750.
b. −\$60,600.
c. −\$111,100.
d. −\$25,250.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:
a. the expected percentage change in the currency for the next day.
b. the standard deviation of the daily percentage changes in the currency over a previous period.
c. the current level of interest rates.
d. the confidence level used.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today’s spot rates, the dollar value of the funds to be received is estimated at \$500,000 for the euros and \$300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

31. Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%.
b. 5.44%.
c. 17.98%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

32. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
a. −9.00%.
b. −30.00%.
c. −5.00%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

33. Appreciation in a firm’s local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
a. reduction; reduction
b. increase; increase
c. increase; reduction
d. reduction; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

34. In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.
a. be hurt by; appreciated
b. benefit from; depreciated
c. be hurt by; depreciated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

35. The ____ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ____ the percentage of a given financial statement item that is susceptible to translation exposure.
a. greater; smaller
b. smaller; greater
c. greater; greater
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

36. Under FASB 52, consolidated earnings are sensitive to the functional currency’s weighted average exchange rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

37. If the U.S. dollar appreciates, an MNC’s:
a. U.S. sales will probably decrease.
b. exports denominated in U.S. dollars will probably increase.
c. interest owed on foreign funds borrowed will probably increase.
d. exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

38. Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of 2. This indicates that:
a. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by 2%.
b. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by .2%.
c. if the foreign currency depreciates by 1%, Mill’s cash flows will increase by 2%.
d. if the foreign currency depreciates by 1%, Mill’s cash flows will decline by 2%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

39. ____ is (are) not a determinant of translation exposure.
a. The MNC’s degree of foreign involvement
b. The locations of foreign subsidiaries
c. The local (domestic) earnings of the MNC
d. The accounting methods used

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

40. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Regression Coefficient (a1) Regression Coefficient (a1)
Currency Earlier Subperiod Recent Subperiod
Australian dollar (A\$) −.80 .10
Sudanese dinar (SDD) .20 .25

Based on these results, which of the following statements is probably not true?
a. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
b. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
e. All of the above are true.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

41. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 5.13%.
b. 2.63%.
c. 4.33%.
d. 5.55%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

42. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC’s funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 17.28%.
b. 13.15%.
c. 14.50%.
d. 12.04%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

43. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

44. Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

45. A firm’s transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

46. Two highly negatively correlated currencies move in tandem almost as if they are the same currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

47. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

48. The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

49. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

50. If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

51. An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

52. Assume a regression model in which the dependent variable is the firm’s stock price percentage change, and the independent variable is percentage change in the foreign currency. The coefficient is negative. This implies that the company’s stock price increases if the foreign currency appreciates.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

53. A company may become more exposed or sensitive to an individual currency’s movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

54. Regression analysis cannot be used to assess the sensitivity of a company’s performance to economic conditions because economic conditions are unpredictable.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

55. A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

56. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

57. The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations is known as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

58. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

59. A reduction in hedging will probably reduce transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

60. The VAR method presumes that the distribution of exchange rate movements is normal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

61. The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

62. If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

63. Some MNCs are subject to economic exposure without being subject to transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

64. If positions in a specific currency among an MNC’s subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC’s overall exposure.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

66. Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.
a. increase; decrease
b. decrease; increase
c. increase; stay the same
d. stay the same; stay the same

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

67. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is \$.012 while the present exchange rate of the British pound is \$1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:
a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
c. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.
d. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

68. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. favorably; weaker
c. not; stronger
d. not; weaker

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

69. If a U.S. firm’s cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

70. If a U.S. firm’s sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; interest expenses
d. negative; gross profit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

71. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:
a. economic exposure.
b. translation exposure.
c. transaction exposure.
d. no exposure to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

72. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except:
a. the interest rate in the country of the subsidiary.
b. proportion of business conducted by the subsidiary.
c. its accounting method.
d. the exchange rate movements of the subsidiary’s currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

73. Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is −2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is \$1.23.
a. −\$38,468
b. −\$21,371
c. −\$17,097
d. −\$4,274

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

74. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is \$1.35.
a. −\$4,303
b. −\$7,830
c. −\$5,873
d. −\$1,958

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

75. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:
a. transaction exposure.
b. economic exposure.
c. translation exposure.
d. all of the above.

PTS: 1 DIF: Moderate
KEY: Bloom’s: Application

76. Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary’s revenue will ____, and its expenses will ____.
a. increase; decrease
b. decrease; remain unchanged
c. decrease; increase
d. increase; remain unchanged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

77. Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen’s depreciation.
a. decrease
b. increase
c. remain unchanged
d. A and C are possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

78. If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

79. A purely domestic firm is never exposed to exchange rate fluctuations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

80. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

81. Currency correlations are generally negative.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

82. Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

83. The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

84. The degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

85. Purely domestic firms are never affected by economic exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

86. Translation exposure affects an MNC’s cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

87. Since earnings can affect stock prices, many MNCs are concerned about translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

88. Which of the following is not true regarding currency correlations?
a. Two highly positively correlated currencies act almost as if they are the same currency.
b. If two inflow currencies are highly positively correlated transaction exposure is somewhat offset.
c. If two inflow currencies are negatively correlated transaction exposure is somewhat offset.
d. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

89. If the U.S. dollar appreciates,
a. an MNC’s U.S. sales will probably decrease.
b. an MNC’s exports denominated in U.S. dollars will probably increase.
c. an MNC’s interest owed on foreign funds borrowed will probably increase.
d. an MNC’s exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

90. Which of the following is not true regarding economic exposure?
a. Even purely domestic firms can be affected by economic exposure.
b. In general, depreciation of the firm’s local currency causes a decrease in both cash inflows and outflows.
c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.
d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

Chapter 11—Managing Transaction Exposure

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

3. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = \$.40
Swiss franc spot rate = \$.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?
a. \$234,000.
b. \$238,584.
c. \$240,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

4. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = \$.40
New Zealand dollar spot rate = \$.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ\$ and expects to receive NZ\$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
a. \$238,584.
b. \$240,000.
c. \$234,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

5. An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
b. use the forward market to sell forward whatever currencies you will receive.
c. use the forward market to buy forward whatever currencies you will receive.
d. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. sell a currency call option in British pounds.
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

8. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:
a. a money market hedge.
c. a forward purchase of euros.
e. selling euro call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

9. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:
a. a money market hedge.
b. a forward sale of yen.
e. selling yen put options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

10. The real cost of hedging payables with a forward contract equals:
a. the nominal cost of hedging minus the nominal cost of not hedging.
b. the nominal cost of not hedging minus the nominal cost of hedging.
c. the nominal cost of hedging divided by the nominal cost of not hedging.
d. the nominal cost of not hedging divided by the nominal cost of hedging.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

11. From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.
a. negative; positive
b. zero; positive
c. zero; zero
d. positive; negative
e. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

12. Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is \$2.02, the 180-day forward rate is \$2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.
a. \$391,210.
b. \$396,190.
c. \$388,210.
d. \$384,761.
e. none of the above

13. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
a. can; can
b. can; cannot
c. cannot; can
d. cannot; cannot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

15. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = \$.61
Spot rate = \$.60
Expected spot rate in 30 days = \$.56
30-day forward rate = \$.62

a. \$630,000.
b. \$610,000.
c. \$600,000.
d. \$590,000.
e. \$580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

16. A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.
a. long-term forward contract
b. currency option contract
c. parallel loan
d. money market hedge

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

17. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.
a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. A and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

Assume the forward rate of the Swiss franc is \$.50 and the spot rate of the Swiss franc is \$.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days.
a. \$101,904
b. \$101,923
c. \$98,769
d. \$96,914
e. \$92,307

19. The forward rate of the Swiss franc is \$.50. The spot rate of the Swiss franc is \$.48. The following interest rates exist:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:
a. \$101,904.
b. \$101,923.
c. \$98,770.
d. \$96,914.
e. \$92,307.

20. Your company will receive C\$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is \$.80. If you use a forward hedge, you will:
b. receive \$750,000 in 90 days.
c. pay \$750,000 in 90 days.
e. receive \$480,000 in 90 days.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

21. A call option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.03 per unit. A put option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be \$1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
a. \$1,169,000.
b. \$1,099,000.
c. \$1,106,000.
d. \$1,143,100.
e. \$1,134,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

22. Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of \$1.68, a 90-day expiration date, and a premium of \$.04. A put option exists on British pounds, with an exercise price of \$1.69, a 90-day expiration date, and a premium of \$.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be \$1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.
a. \$360,000.
b. \$338,000.
c. \$332,000.
d. \$336,000.
e. \$344,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

23. Assume that Kramer Co. will receive SF800,000 in 90 days. Today’s spot rate of the Swiss franc is \$.62, and the 90-day forward rate is \$.635. Kramer has developed the following probability distribution for the spot rate in 90 days:

Possible Spot Rate
in 90 Days Probability
\$.61 10%
\$.63 20%
\$.64 40%
\$.65 30%

The probability that the forward hedge will result in more dollars received than not hedging is:
a. 10%.
b. 20%.
c. 30%.
d. 50%.
e. 70%.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

24. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S\$) in 180 days. Today’s spot rate of the S\$ is \$.50, and the 180-day forward rate is \$.53. A call option on S\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on S\$ exists, with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.53 60%
\$.55 30%

The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
a. 0%
b. 10%
c. 30%
d. 40%
e. 70%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ\$) in 180 days. Today’s spot rate of the NZ\$ is \$.50, and the 180-day forward rate is \$.51. A call option on NZ\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on NZ\$ exists with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.49 60%
\$.55 30%

The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

26. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a. index
b. futures
c. forward
d. money market
e. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

27. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is \$.23. Furthermore, Money’s financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are \$.20 and \$.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____.
a. \$0.
b. −\$7,500.
c. \$7,500.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

28. Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the next quarter, Hanson has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is \$1.50. Furthermore, Hanson’s financial center has indicated that the possible values of the British pound at the end of next quarter are \$1.57 and \$1.59, with probabilities of .50 and .50, respectively. Based on this information, what is the expected real cost of hedging payables?
a. \$80,000.
b. −\$80,000.
c. \$1,570,000.
d. \$1,580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

Exhibit 11-1

U.S. Jordan
360-day borrowing rate 6% 5%
360-day deposit rate 5% 4%

29. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?
a. \$377,115.
b. \$373,558.
c. \$363,019.
d. \$370,000.

30. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.46. What is Pablo’s cost from implementing a money market hedge (assume Pablo does not have any excess cash)?
a. \$224,135.
b. \$226,269.
c. \$224,114.
d. \$223,212.

31. Lorre Company needs 200,000 Canadian dollars (C\$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:

Possible Value of
Canadian Dollar in 90 Days Probability
\$0.54 15%
0.57 25%
0.58 35%
0.59 25%

The 90-day forward rate of the Canadian dollar is \$.575, and the expected spot rate of the Canadian dollar in 90 days is \$.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?
a. 40%.
b. 60%.
c. 15%.
d. 85%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

32. Quasik Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount received from the currency option hedge?
a. \$219,000.
b. \$222,000.
c. \$216,000.
d. \$213,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

33. FAB Corporation will need 200,000 Canadian dollars (C\$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
a. \$144,000.
b. \$148,000.
c. \$152,000.
d. \$150,000.

SOLUTION: (\$.71 + \$.01)  200,000 = \$144,000. Note: the call option is not exercised since the spot rate is less than the exercise price.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

34. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A\$) 180 days from now. Put options are available for a premium of \$.02 per unit and an exercise price of \$.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:

Future Spot Rate Probability
\$.46 20%
\$.48 30%
\$.52 50%

The 90-day forward rate of the Australian dollar is \$.50.

What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a. 0%.
b. 80%.
c. 50%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

35. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
a. put option
b. forward
c. call option
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

36. Which of the following is the least effective way of hedging exposure in the long run?
a. long-term forward contract.
b. currency swap.
c. parallel loan.
d. money market hedge.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

37. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.
b. lagging
c. cross-hedging
d. currency diversification
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

38. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries and it may not be necessary to hedge the position of each individual subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

39. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a. receivable; purchase
b. payable; sell
c. payable; purchase
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

40. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.
a. forward; small
b. futures; large
c. forward; large
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

41. Celine Co. will need €500,000 in 90 days to pay for German imports. Today’s 90-day forward rate of the euro is \$1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be \$1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be \$1.09. Based on this information, the expected value of the real cost of hedging payables is \$____.
a. −35,000
b. 25,000
c. −1,000
d. 1,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

42. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
a. highly positive.
b. highly negative.
c. zero.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

43. If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency as a dollar amount for comparison purposes.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

44. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?
a. \$952,381.
b. \$995,851.
c. \$943,396.
d. \$995,025.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

45. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
a. \$1,000,000.
b. \$1,055,602.
c. \$1,000,830.
d. \$1,045,644.

46. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

47. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

48. To hedge a contingent exposure, in which an MNC’s exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.
a. money market
b. futures
c. forward
d. options

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

49. A ____ is not normally used for hedging long-term transaction exposure.
a. long-term forward contact
b. futures contract
c. currency swap
d. parallel loan

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

50. The ____ does not represent an obligation.
a. long-term forward contract
b. currency swap
c. parallel loan
d. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

51. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

52. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

53. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

54. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

55. MNCs generally do not need to hedge because shareholders can hedge their own risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

56. Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

58. When the real cost of hedging is positive, this implies that hedging was more favorable than not hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

59. A futures hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

60. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

61. The price at which a currency put option allows the holder to sell a currency is called the settlement price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

62. A put option essentially represents two swaps of currencies, one swap at the inception of the loan contract and another swap at a specified date in the future.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

63. The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

64. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

65. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

66. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

67. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

68. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

69. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of \$.68 and a premium of \$.02 is available. Also, a 180-day put option with an exercise price of \$.66 and a premium of \$.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is \$.67, what is the amount received from the currency option hedge (after considering the premium paid)?
a. \$330,000
b. \$325,000
c. \$320,000
d. \$340,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

72. You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of \$.01 per unit and an exercise price of \$.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:

Future Spot Rate Probability
\$.01035 20%
\$.01032 20%
\$.01030 30%
\$.01029 30%

The 90-day forward rate of the Japanese yen is \$.01033.

What is the probability that the call option will be exercised (assuming Montana purchased it)?
a. 30%
b. 60%
c. 20%
d. 40%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

73. If an MNC assesses net transaction exposure, this refers to the consolidation of all expected inflows for a particular time and currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Comprehension

74. Most MNCs do not perceive their foreign exchange management as a profit center. Rather, their main responsibility is to assess potential exposure and determine how and if the exposure should be hedged.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

75. If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

76. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

77. To hedge a payable position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the U.S. until the payable is due.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

78. If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

79. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

80. An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

81. To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

82. Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

83. If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

85. Most MNCs can completely hedge all of their transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

86. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

87. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

88. Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

89. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

90. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a. index
b. futures
c. forward
d. money market
e. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

91. A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
a. the foreign currency; U.S.
b. the foreign currency; foreign country
c. dollars; foreign country
d. dollars; U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

92. FAI Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90-day call option with an exercise price of \$0.75 and a premium of \$0.01 is available. Also, a 90-day put option with an exercise price of \$0.73 and a premium of \$0.01 is available. FAI plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$0.71, what is the net amount received from the currency option hedge?
a. \$219,000
b. \$222,000
c. \$216,000
d. \$213,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

Chapter 12—Managing Economic Exposure and Translation Exposure

1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
b. be reduced; selling
c. increase; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

2. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. be unaffected by; benefit from
e. benefit from; benefit from

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

3. Whitewater Co. is a U.S. company with sales to Canada amounting to C\$8 million. Its cost of materials attributable to the purchase of Canadian goods is C\$6 million. Its interest expense on Canadian loans is C\$4 million. Given these exact figures above, the dollar value of Whitewater’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of Whitewater’s cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by \$800,000. This strategy would ____ the Sycamore’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

5. Which of the following is an example of economic exposure but not an example of transaction exposure?
a. An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.
b. An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
c. A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
d. A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

6. Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)
a. The dollar value of sales is higher if the pound depreciates against the dollar.
b. The dollar value of sales is unaffected by the pound’s exchange rate.
c. A and B
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

7. If a U.S. firm’s expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

8. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

9. Any restructuring of operations that ____ the difference between a foreign currency’s inflows and outflows may ____ economic exposure.
a. reduces; increase
b. increases; reduce
c. reduces; reduce
d. A and B
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

10. It is generally least difficult to effectively hedge various types of:
a. translation exposure.
b. transaction exposure.
c. economic exposure.
d. A and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

11. With regard to hedging translation exposure, translation losses ____, and gains on forward contracts used to hedge translation exposure ____.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

12. If a firm does not have foreign subsidiaries, it is not subject to ____.
a. transaction exposure
b. economic exposure
c. A and B
d. translation exposure

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

13. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.
a. negative
c. favorably affected
d. unaffected

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

14. Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.
a. loss; smaller
b. loss; larger
c. gain; larger
d. gain; smaller

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

15. A perfect hedge (full coverage) on translation exposure can usually be achieved when:
a. using the money market hedge.
b. using the forward hedge.
c. using the futures hedge.
d. none of the above, since a perfect hedge is nearly impossible.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

16. Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
a. closing down most of its plants in the U.S.
b. producing more automobiles in the U.S.
c. relying completely on Japanese suppliers for its parts.
d. pricing its exports in dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

17. Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?
a. increase Zambian supply orders.
b. increase Zambian sales.
c. restructure debt to increase debt payments in Zambia.
d. reduce Zambian sales.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

18. Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent.
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses.
c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany.
d. All of the above firms are exposed to translation exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

19. ____ represents any impact of exchange rate fluctuations on a firm’s future cash flows.
a. Translation exposure
b. Economic exposure
c. Transaction exposure
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

20. An effective way for an MNC to assess its economic exposure is to review the firm’s:
a. income statement.
b. liquidity.
c. retained earnings.
d. level of stockholders’ equity.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

21. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency.
b. cash outflows exceed cash inflows in each foreign currency.
c. cash inflows match cash outflows in each foreign currency.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

22. Managing economic exposure is generally perceived to be ____ managing transaction exposure.
a. more difficult than
b. less difficult than
c. just as difficult as
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

23. As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution.
a. short-term
b. long-term
c. immediate
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Knowledge

24. Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.
a. positive; positively
b. positive; negatively
c. negative; positively
d. B and C
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

25. Assume that an MNC’s cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

26. An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC’s foreign currency revenues will convert to ____ dollars.
a. more; fewer
b. more; more
c. less; fewer
d. less; more

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

27. An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.
a. asset; matches
b. asset; exceeds
c. liability; matches
d. liability; is less than

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.03
KEY: Bloom’s: Comprehension

28. Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.03
KEY: Bloom’s: Knowledge

29. ____ exposure occurs when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. Translation
b. Transaction
c. Economic
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

30. ____ is (are) not a limitation of hedging translation exposure.
a. Inaccurate stock price forecasts
b. Inadequate forward contracts for some currencies
c. Taxation on gains from forward contracts
d. Increased transaction exposure

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

31. To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.
a. purchase the currency forward
b. sell the currency forward
c. purchase futures contracts of the currency
d. A or C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

32. Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.
a. tax deductible; not taxed
b. not tax deductible; not taxed
c. not tax deductible; taxed
d. tax deductible; taxed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

33. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

34. A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

35. U.S. firms can attempt to hedge their translation exposure of their European subsidiaries with a forward purchase of euros.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

36. Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

37. A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

38. The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

39. All MNCs are subject to translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

40. U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies were probably less affected by the weakness of Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

41. The management of economic exposure is normally focused completely on transactions that will occur in the next three months.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

42. Transaction exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

43. Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

44. Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
b. decrease; selling
c. increase; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

45. Sarakose Co. is a U.S. company with sales to Canada amounting to C\$5 million. Its cost of materials attributable to the purchase of Canadian goods is C\$7 million. Its interest expense on Canadian loans is C\$5 million. The dollar value of Sarakose’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

46. If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

47. Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its supplies from American firms and has no competition in the U.S. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains its supplies from a Canadian firm. Based on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure.
a. transaction; translation
b. translation; transaction
c. economic; transaction
d. economic; translation

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

48. Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to ____ exposure.
a. economic
b. transaction
c. translation
d. economic and transaction

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Comprehension

49. Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C\$500,000 next year. The Canadian dollar is valued at about \$.90. The net cash flows from U.S. operations are supposed to be \$200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:
b. increase its borrowings in U.S.
c. decrease prices on Canadian goods.
d. decrease its borrowed funds in Canada.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Comprehension

50. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury’s consolidated earnings were ____ affected by the euro’s movement, and Mercury’s hedge position was ____ affected by the euro’s movement.
a. favorably; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

51. All MNCs are subject to transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

52. A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

53. Economic exposure represents any impact of exchange rate fluctuations on a firm’s future cash flows and thus includes transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

54. To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.02
KEY: Bloom’s: Knowledge

55. When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility in restructuring operations is to reduce foreign sales.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

56. Even if translation exposure does not affect cash flows, it is a concern of many MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

57. Translation exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

58. Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

59. Which of the following statements is incorrect?
a. Transaction exposure represents only the exchange rate risk when converting net foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send payments.
b. Economic exposure represents any impact of exchange rate fluctuations on a firm’s future cash flows.
c. Firms can simply focus on hedging their foreign currency payables and/or receivables to hedge economic exposure.
d. The management of economic exposure tends to serve as a long-term solution rather than just a short-term solution.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
KEY: Bloom’s: Knowledge

60. Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from imports from Cyprus. However, Thornton’s revenues are denominated solely in U.S. dollars. Which of the following is probably not true?
a. Thornton would benefit from a depreciation of the Cyprus pound.
b. Thornton has at least some transaction exposure.
c. Thornton has at least some economic exposure.
d. Thornton has at least some translation exposure.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

61. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

62. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would ____ from a(n) ____ of the Jamaican dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. not benefit; depreciation
e. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Comprehension

63. ____ is (are) a limitation of hedging translation exposure.
a. Inaccurate earnings forecasts
b. Inadequate forward contracts for some currencies
c. Accounting distortions
d. Increased transaction exposure
e. All of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.04
KEY: Bloom’s: Knowledge

Chapter 13—Direct Foreign Investment

1. Based on the text, it should be obvious that markets are ____ in reality, and consequently, monopolistic advantages ____ be exploited.
a. perfect; may possibly
b. perfect; cannot
c. imperfect; may possibly
d. imperfect; cannot

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

2. When a firm analyzes the feasibility of a project, it should consider the:
a. variability of the project’s cash flow.
b. correlation of the project’s cash flow relative to the prevailing cash flows of the MNC.
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

3. The ____ a project’s variability in cash flows, and the ____ the positive correlation between the project’s cash flow and the MNC’s cash flow, the lower the risk of the project.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

4. The most important cost-related motive for direct foreign investment is diversification across product markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

5. Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____.
a. higher; large
b. higher; small
c. lower; small
d. higher; large

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

6. According to the text, a firm may be able to achieve a “more efficient” project portfolio if it:
a. focuses solely on one product.
b. focuses solely on one location to market what it produces.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

7. According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:
a. would compete with local firms of the host country.
b. would produce a good not currently available in the host country.
c. would produce a good and export it to other countries.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

8. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.
a. high and positive; more
b. close to zero; more
c. high and positive; less
d. close to zero; less

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

9. A firm will likely benefit most from diversifying if:
a. the correlations between country economies are high.
b. the correlations between country economies are low.
c. the variability of all country economy levels is high.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

10. When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

11. Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of ____ motives by U.S. firms that engage in direct foreign investment.
a. revenue-related
b. cost-related
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

12. Which of the following is a reason to consider international business?
a. economies of scale.
c. diversification.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

13. From the concept of an “efficient frontier,” the point on a frontier that is optimal for all firms:
a. is the top point.
b. is the point closest to the vertical axis.
c. is the point half way between the two end points.
d. cannot be determined since firms vary in their willingness to accept risk.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

14. Direct foreign investment is perceived by foreign governments to:
a. be a cause of national problems.
b. be a remedy for national problems.
c. either A or B is possible.
d. have no impact on national problems.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

15. Direct foreign investment would typically be welcomed if:
a. the products to be produced are substitutes for other locally produced products.
b. people from the country of the company’s headquarter are transferred to the foreign country to work at the subsidiary.
c. the products to be produced are going to be exported.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

16. Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.
a. increase; postpone remitting earnings until the pound strengthens
b. decrease; postpone remitting earnings until the pound strengthens
c. decrease; remit earnings immediately before the pound strengthens
d. increase; remit earnings immediately before the pound strengthens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

17. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?
a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

18. Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:
a. the host government of that country eliminates all quotas.
b. the host government of that country reduces all quotas.
c. the host government of that country increases all quotas.
d. the host government of that country eliminates all tariffs.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

19. A country with high unemployment could best increase its employment by:
a. encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
b. encouraging foreign firms to establish licensing arrangements for products local firms produce.
c. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
d. none of the above would reduce employment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

20. According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.
a. Paraguay
b. Morocco
c. Sweden
d. China

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

21. ____ is not a disadvantage of direct foreign investment.
a. The expense of establishing a foreign subsidiary
b. The uncertainty of inflation and exchange rate movements
c. Political risk
d. All of the above are disadvantages of direct foreign investment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

22. Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm’s overall returns.
a. decrease
b. increase
c. decrease or increase, depending on the exact size of the returns and standard deviations
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Application

23. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b. Host governments generally perceive DFI as a remedy to eliminate a country’s political problems.
c. The ability of a host government to attract DFI is dependent on the country’s markets and resources.
d. Some types of DFI will be more attractive to some governments than to others.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

24. Which of the following is not true regarding the efficient frontier considered by MNCs?
a. There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.
b. The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects.
c. Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
d. All of the above are true.
e. A and C are false.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

25. Which of the following is not a cost-related motive of direct foreign investment?
a. International diversification.
b. Low labor costs.
c. Land can be purchased at a low price.
d. Manufacturing plants can be built for a low price.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

26. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

27. ____ is not a revenue-related motive for direct foreign investment.
a. Attracting new sources of demand
b. Fully benefiting from economies of scale
d. Entering profitable markets

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

28. ____ is not a cost-related motive for direct foreign investment.
b. Fully benefiting from economies of scale
c. Using foreign factors of production
d. Using foreign raw materials

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

29. When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.
a. overvalued; high
b. overvalued; low
c. undervalued; high
d. undervalued; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

30. Developing countries are mostly targeted because they have advanced technology.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

31. Direct foreign investment is normally completed first, and then capital budgeting can be applied later.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

32. The best means to accomplish the revenue-related motive of attracting new sources of demand is to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

33. To enter markets where superior profits are possible, an MNC should:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

34. To exploit monopolistic advantages, an MNC should:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets where competitors are unable to produce the identical product.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

35. To fully benefit from economies of scale, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other operations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

36. To use foreign factors of production, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other operations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

37. They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

38. When economic conditions of two countries are ____, then a firm would ____ its risk by operating in both countries instead of concentrating just in one.
a. highly correlated; reduce
b. not highly correlated; not reduce
c. not highly correlated; reduce
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

39. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as “optimal” for all MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

40. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

41. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

42. Although direct foreign investment is sometimes conducted, benefits are rarely realized.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

43. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

44. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

45. In assessing the risk of an individual project, the expected correlation of the new project’s returns with those of the prevailing business should be considered.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

46. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Comprehension

47. Countries in eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in western Europe.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

48. Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.
a. increase; postpone remitting earnings until the euro weakens
b. decrease; postpone remitting earnings until the euro weakens
c. decrease; remit earnings immediately before the euro weakens
d. increase; remit earnings immediately before the euro weakens

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Application

49. To diversify internationally for the purpose of reducing risk, which strategy is appropriate?
a. Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based.
b. Establish a subsidiary in a market that has relatively low cost of labor or land.
c. Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time.
d. Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

50. To fully benefit from use of foreign raw materials:
a. establish a subsidiary in a market where raw materials are cheap and accessible.
b. sell the finished product to countries where the raw materials are more expensive.
c. establish a subsidiary in a new market that can sell products produces elsewhere.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

51. Procedural and documentation requirements imposed by the foreign government are referred to as:
a. regulatory barriers.
b. industry barriers.
c. protective barriers.
d. “Red Tape” barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

52. Constraints pertaining to taxes, currency convertibility, earnings remittance, and employee rights are best described as:
a. ethical differences.
b. regulatory barriers.
c. quota barriers.
d. “Red Tape” barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

53. Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:
a. protective barriers.
b. “red tape” barriers.
c. ethical differences.
d. regulatory barriers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Comprehension

54. The overall variability of a firm’s returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Comprehension

55. MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

56. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

57. Direct foreign investment is commonly considered by MNCs because it allows the MNC to:
a. attract new sources of demand.
b. enter profitable markets.
c. react to exchange rate movements.
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

58. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b. Host governments generally perceive DFI as a remedy for their national problems.
c. The ability of a host government to attract DFI is dependent on the country’s markets and resources.
d. Some types of DFI will be more attractive to some governments than to others.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.03
KEY: Bloom’s: Knowledge

59. ____ is not a cost-related motive for direct foreign investment (DFI).
a. Using foreign factors of production
b. Using foreign raw materials
c. Using foreign technology
e. Fully benefiting from economies of scale

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

60. When a foreign currency is perceived by a firm to be ____, the firm will probably ____ direct foreign investment in that country.
a. undervalued; consider
b. undervalued; not consider
c. overvalued; not consider
d. A and C
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

61. The best means of using direct foreign investment (DFI) to fully benefit from cheap foreign factors of production is probably to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary in a new market that can sell products produced elsewhere; this allows for increased production and possibly greater production efficiency.
c. establish a subsidiary in a market that has relatively low costs of labor and land; sell the finished product to countries where the cost of production is higher.
d. establish a subsidiary in a market in which raw materials are cheap and accessible; sell the finished product to countries in which the raw materials are more expensive.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.13.01
KEY: Bloom’s: Knowledge

62. The ____ the correlation in project returns is over time, the ____ will be the project portfolio risk as measured by the portfolio variance.
a. lower; lower
b. higher; lower
c. lower; higher
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.13.02
KEY: Bloom’s: Knowledge

Chapter 14—Multinational Capital Budgeting

1. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a ____ after the subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
d. B and C are both ideal.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
b. a payback period.
c. certainty equivalents.
d. simulation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

3. When evaluating international project cash flows, which of the following factors is relevant?
a. future inflation.
b. blocked funds.
c. exchange rates.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary’s perspective, which variable will most likely influence the capital budgeting analysis?
a. the withholding tax rate.
b. the euro’s exchange rate.
c. the U.S. tax rate on earnings remitted to the U.S.
d. the German government’s tax rate.
e. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

7. In capital budgeting analysis, the use of a cumulative NPV is useful for:
a. determining a probability distribution of NPVs.
b. determining the time required to achieve a positive NPV.
c. determining how the required rate of return changes over time.
d. determining how the cost of capital changes over time.
e. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Knowledge

8. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:
a. the cost of borrowing funds in the U.K.
b. the economic conditions in the U.K.
c. the parent’s cost of capital.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

10. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
a. the subsidiary finances the entire investment by local borrowing.
b. the subsidiary finances most of the investment by local borrowing.
c. the parent finances most of the investment.
d. the parent finances the entire investment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

11. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be ____ affected by the project.
c. favorably; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

12. An MNC is considering establishing a two-year project in New Zealand with a \$30 million initial investment. The firm’s cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ\$12 million in Year 1 and NZ\$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of \$.60 per NZ\$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

13. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
a. fixed
b. volatile
c. stable
d. none of the above, as the firm is not exposed

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

14. If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

15. Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

16. If a multinational project is assessed from the subsidiary’s perspective, withholding taxes are ignored for project assessment.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

17. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

18. The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:
a. the taxes are the same as in the U.S.
b. there are no blocked fund restrictions.
c. the currency of the host country is expected to depreciate consistently.
d. none of the above; a discrepancy is not possible.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

19. The break-even salvage value of a particular project is the salvage value necessary to:
a. offset any losses incurred by the subsidiary in a given year.
b. offset any losses incurred by the MNC overall in a given year.
c. make the project have zero profits.
d. make the project’s return equal the required rate of return.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

20. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.
a. very high; limited
b. very low; limited
c. very low; numerous
d. very high; numerous

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Comprehension

21. One foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent’s perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent’s perspective.
a. negative
b. higher than that for the Hungarian project
c. lower than that for the Hungarian project
d. the same as that for the Hungarian project
e. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

22. Exchange rates for purposes of multinational capital budgeting:
a. are very difficult to forecast.
b. can be easily hedged with currency swaps.
c. are unimportant, as they do not affect the cash flows of the multinational project.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

23. A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.
a. lower
b. increase
c. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
d. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Application

Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is \$5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):

Year 1 Year 2 Year 3 Year 4
NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000

The current exchange rate of the Norwegian kroner is \$.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:

Year 1 Year 2 Year 3 Year 4
\$.13 \$.14 \$.12 \$.15

24. Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a. −\$803,848.
b. \$5,803,848.
c. \$1,048,829.
d. none of the above

25. Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is \$____.
a. 510,088.04
b. 1,710,088
c. 1,040,000
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.03
KEY: Bloom’s: Application

26. Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%?
a. −\$17,602.62.
b. \$8,000,000.
c. \$1,048,829.
d. \$645,147.

27. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A\$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest \$1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be \$.55 and \$.60, respectively?
a. \$2,905,817.
b. −\$94,183.
c. \$916,128.
d. none of the above

28. Which of the following is not a characteristic of a country to be considered within an MNC’s international tax assessment?
a. corporate income taxes.
b. withholding taxes.
c. provisions for carrybacks and carryforwards.
d. tax treaties.
e. all of the above are characteristics to be considered.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

29. Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.
a. withholding taxes
b. excise taxes
c. tax credits
d. carryforwards

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

30. If the parent’s government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.
a. high; subsidiary’s
b. high; parent’s
c. low; parent’s
d. A and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

31. If a subsidiary project is assessed from the subsidiary’s perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.
a. positively
b. negatively
c. either positively or negatively, depending on the percentage appreciation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

32. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:
a. the parent’s perspective should be used to evaluate a foreign project.
b. the subsidiary’s perspective should be used to evaluate a foreign project.
c. the foreign project should enhance the value of both the parent and the subsidiary.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

33. The ____ is (are) likely the major source of funds to support a particular project.
a. initial investment
b. variable costs
c. fixed costs
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

34. Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined on a proposed foreign project.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

35. The required rate of return of a project is ____ the MNC’s cost of capital.
a. greater than
b. less than
c. the same as
d. any of the above, depending on the specific project

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

36. An international project’s NPV is ____ related to the size of the initial investment and ____ related to the project’s required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

37. An international project’s NPV is ____ related to consumer demand and ____ related to the project’s salvage value.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

38. Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project’s NPV will be.
a. higher; lower
b. higher; higher
c. lower; higher
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

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

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

40. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
a. a more pronounced impact on revenues than on costs.
b. a less pronounced impact on revenues than on costs.
c. the same impact on revenues as on costs.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

41. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.
a. should be; should be
b. should definitely not be; should definitely not be
c. should definitely not be; should be
d. should be; should definitely not be

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

42. As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent’s exchange rate exposure ____.
a. increases; decreases
b. decreases; increases
c. increases; increases
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

43. In conducting a multinational capital budgeting analysis, the subsidiary’s perspective should always be used.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

44. The feasibility of a multinational project from the parent’s perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

45. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

46. In multinational capital budgeting, depreciation is treated as a cash outflow.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Knowledge

47. No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

48. If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary’s investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

49. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

50. When managers use NPV analysis, agency costs are eliminated, and governance is not needed to monitor MNC decisions regarding projects.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

51. Sometimes, a multinational project may appear feasible from the subsidiary’s perspective but not from the parent’s perspective and vice versa.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

52. Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate in attempting to determine whether a project will enhance the firm’s value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.01
KEY: Bloom’s: Comprehension

53. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC’s cost of capital because of that particular project’s risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

54. If a parent’s perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

55. If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

56. Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Knowledge

57. The greater the uncertainty about a project’s forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Comprehension

58. The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

59. ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s after-tax cash flows.
a. The number of units sold by the subsidiary
b. The subsidiary’s earnings before income and taxes (EBIT)
c. The tax rate the subsidiary is subject to in the host country
d. Withholding taxes imposed by the host government

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Comprehension

60. ____ is an input required for a multinational capital budgeting analysis, given that it is conducted from the parent’s viewpoint.
a. Salvage value
b. Price per unit sold
c. Initial investment
d. Consumer demand
e. All of the above are inputs required for capital budgeting analysis.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.02
KEY: Bloom’s: Knowledge

61. ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
a. Discriminant analysis
c. Sensitivity analysis
d. Simulation

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Knowledge

62. Which of the following is not true regarding simulation?
a. It can be used to generate a probability distribution of NPVs.
b. It generates a probability distribution of NPVs by randomly drawing values for the input variable(s).
c. It can only be used for one variable at a time.
d. It can be used to develop probability distributions of all variables with uncertain future values.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.05
KEY: Bloom’s: Comprehension

63. Which of the following is not a factor that should be considered in multinational capital budgeting?
a. Blocked funds
b. Exchange rate fluctuations
c. Inflation
d. Financing arrangements
e. All of the above should be considered.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.14.04
KEY: Bloom’s: Knowledge

Chapter 15—International Corporate Governance and Control

1. International governance is achieved by all of the following except:
a. poison pills.
b. board of directors.
c. institutional investors.
d. blockholders.
e. All of the above achieve governance.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

2. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?
a. The firm can immediately expand its international business.
b. An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary.
c. International acquisitions are generally cheaper than the establishment of a new subsidiary.
d. An international acquisition typically generates larger cash flows than the establishment of a new subsidiary.
e. All of the above are advantages of international acquisitions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

3. According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.
a. the U.K.
b. Mexico
c. Japan
d. Germany
e. France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

4. Which of the following is not true regarding a target’s previous cash flows?
a. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.
b. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
c. They are always good indicators of future cash flows.
d. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

5. As far as the managerial talent of the target is concerned:
a. the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target.
b. downsizing will reduce expenses and increase productivity and revenues.
c. governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated.
d. all of the above
e. A and C only

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

6. Based on information in your text, all of the following factors should be considered in an international acquisition, except:
a. the target’s willingness to be acquired.
b. the target’s previous acquisition history.
c. the target’s previous cash flows.
d. the target’s local economic conditions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

7. Which of the following tax-related factors need not be considered in assessing a foreign target?
a. corporate tax rates in the host country.
b. withholding tax rates in the host country.
c. withholding tax rates in the home country.
d. corporate tax rates in the home country.
e. all of the above must be considered in assessing a foreign target.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

• Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

• Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years.

• Cost of goods sold are expected to be 60% of revenues.

• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

• The Malaysian tax rate on the target’s earnings is expected to be 30%.

• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

• The target will need MYR9 million in cash each year to support existing operations.

• The target’s current stock price is MYR35 per share. The target has 11 million shares outstanding.

• Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently \$.23.

• Klimewsky’s required rate of return on similar projects is 13%.

8. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is \$____ million.
a. 155.9
b. 111.5
c. 138.0
d. 143.0
e. none of the above

9. Refer to Exhibit 15-1. The Malaysian target’s value based on its stock price is \$____ million.
a. 1.4
b. 1,673.9
c. 111.5
d. 88.6
e. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

10. Refer to Exhibit 15-1. The target’s board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer?
a. 30.0%.
b. 25.9%.
c. you should not offer any premium because the market’s valuation is below Klimewsky’s valuation.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

11. Which of the following would probably not cause the stock price of a foreign target to decrease?
a. Its expected cash flows decline.
b. General stock market conditions in the foreign country are deteriorating.
c. Investors anticipate that the target will be acquired.
d. All of the above will cause the target’s stock price to decrease.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

12. Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target?
a. differences in the timing of remittances from the target to the parent.
b. differences in the desired use of the target.
c. differences in the local risk-free interest rate.
d. differences in the ability to use financial leverage.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Comprehension

13. Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?
a. international acquisition.
c. international alliance.
d. international divestiture.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

14. A previously undertaken project in a foreign country may no longer be feasible because:
a. interest rates have declined.
b. the MNC’s cost of capital has decreased.
c. the host government has increased its tax rates substantially.
d. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

15. An international alliance typically requires a ____ initial outlay than an international acquisition, and the cash flows to be received will typically be ____ than the cash flow resulting from an international acquisition.
a. smaller; larger
b. smaller; smaller
c. larger; smaller
d. larger; larger

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Comprehension

16. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

17. At present, U.S. firms acquire more targets in the former Soviet Union than in any other country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

18. The U.S. is one of the few countries with agencies that monitor mergers and acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

19. The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

20. Since the cash flows generated by a foreign target will eventually be converted to the parent’s currency, there is no need to consider the foreign exchange rate in the capital budgeting process.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

21. From an acquirer’s perspective, the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Comprehension

22. Premiums required to entice a target’s board of directors to approve an acquisition are usually between 1 and 3 percent of the target’s market price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

23. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

24. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

25. The valuation of a target (from the parent’s perspective) should increase when the potential acquirer’s cost of capital increases.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Comprehension

26. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

27. Acquirers may have different required rates of return because of differences in the ability to use financial leverage.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

28. An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

29. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target’s country are generally high.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

30. Privatization involves the sale of previously government-owned businesses by the government.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

31. An MNC should periodically reassess its investments to determine whether to divest them.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

32. The initial outlay for a project in a foreign country may decline if property values in that country decline.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

33. The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign target that has operated privately for several years.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

34. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:
a. the Chinese yuan would depreciate in the future.
b. the Chinese yuan would appreciate in the future.
c. the Chinese yuan would remain somewhat stable in the future.
d. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Application

35. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary?
a. the required rate of return on the subsidiary.
b. forecasted exchange rates of the subsidiary’s currency relative to the dollar.
c. the initial outlay on the project.
d. the possible selling price of the project.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

36. Regarding the valuation of privatized businesses in less developed countries, ____ can normally be estimated with a high degree of accuracy.
a. future cash flows
b. future exchange rate movements
c. the proper discount rate
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

37. U.S. firms acquire more target firms in ____ than in any other country.
a. Spain
b. Italy
c. Belgium
d. United Kingdom

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

38. Firms based in ____ tend to acquire more U.S. target firms than the other countries listed here.
b. Japan
c. Germany
d. Mexico

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

39. The sale of a subsidiary by an MNC is referred to as a divestiture.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

40. An MNC’s parent would consider investing in a target only if the estimated present value of the cash flows it would ultimately receive from the target over time ____ the initial outlay necessary to purchase the target.
a. is less than
b. is the same as
c. is greater than
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

41. Which of the following would not enhance the value of a target from the acquirer’s perspective?
a. Expected sales of the target have increased.
b. The subsidiary’s currency is expected to strengthen after the acquisition.
c. The required rate of return from investing in the target has increased.
d. All of the above would enhance the value of the target.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

42. An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a public target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

43. A target’s previous cash flows are typically an accurate indicator of future cash flows, especially when the target’s cash flows would have to be converted into the acquirer’s home currency as they are remitted to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

44. Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.
a. strong; lower
b. weak; higher
c. weak; lower
d. strong; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

45. When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____.
a. low; not excessive
b. high; excessive
c. high; not excessive
d. low; excessive

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

46. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement.
a. low
b. high
c. volatile
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

47. If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

48. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros.
a. 2.4
b. 60.0
c. 41.7
d. 12

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Application

49. If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.
a. appreciates; by a lesser percentage then
b. depreciates; in the same proportion as
c. appreciates; in the same proportion as
d. appreciates; by a greater percentage than

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

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

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

51. Even after an MNC’s accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

52. An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

53. The Sarbanes-Oxley Act requires more accountability by executives and the board of directors when assessing acquisitions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

54. When viewed as a project, the international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

55. Downsizing reduces expenses but may also reduce productivity and revenue.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

56. Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target’s home country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

57. When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

58. Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Comprehension

59. A foreign target’s expected future cash flows generally vary among different MNCs valuing the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

60. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

61. The value of an MNC (from the parent’s perspective) is independent of the MNC’s desired scheduling of remitted funds from the target.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

62. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.05
KEY: Bloom’s: Knowledge

63. While acquisitions of privatized businesses may be attractive because of the potential for MNCs to increase their efficiency, the valuation of these businesses is generally more difficult.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

64. It is always the best course of action to divest of a foreign project if the expected cash flows from the project decline substantially.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

65. The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

66. The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly after a bid by the acquiring firm.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Comprehension

67. A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the same industry to the private company’s earnings.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.04
KEY: Bloom’s: Knowledge

68. The ideal time to purchase a foreign company is when the spot rate of that company’s currency is perceived to be very high and is expected to decrease over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

69. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?
a. The firm can immediately expand its international business.
b. The firm benefits from existing customer relationships.
c. International acquisitions are generally cheaper than the establishment of a new subsidiary.
d. An international acquisition typically generates quicker and larger cash flows than the establishment of a new subsidiary.
e. All of the above are advantages of international acquisitions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

70. An MNC valuing a foreign target for acquisition purposes must account for all of the following, except:
a. the foreign exchange rate.
b. withholding taxes imposed by the host government.
c. blocked-funds restrictions.
d. income taxes imposed by the U.S. government.
e. An MNC must account for all of the above.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

71. According to your text, all of the following are factors to be considered in an international acquisition, except
a. the target’s willingness to be acquired.
b. the target’s previous acquisition history.
c. the target’s previous cash flows.
d. the target’s local economic conditions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

72. Which of the following would probably not cause the stock price of a foreign target to decrease?
a. Its expected cash flows decline.
b. General stock market conditions in the foreign country are deteriorating.
c. Investors anticipate that the target will be acquired.
d. All of the above will cause the target’s stock price to decrease.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.02
KEY: Bloom’s: Knowledge

73. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?
a. Differences in estimated cash flows to be generated by the foreign target
b. Differences in estimated exchange rates
c. Differences in required rates of return
d. All of the above are possible reasons why the valuation of a foreign target may vary among MNCs

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.15.03
KEY: Bloom’s: Knowledge

74. The valuation of a newly privatized business is generally more difficult than the valuation of a publicly traded firm because:
a. It has previously operated in environments of very high competition.
b. Interest rates in the countries where privatization takes place are extremely high.
c. The stock markets in the countries where privatization takes place are overvalued.
d. Economic conditions in the countries where privatization takes place are very uncertain.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.15.06
KEY: Bloom’s: Knowledge

Chapter 16—Country Risk Analysis

1. A macro-assessment of country risk:
b. excludes all aspects relevant to a particular firm or project.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

2. A micro-assessment of country risk:
b. excludes all aspects relevant to a particular firm or project.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

3. The Delphi technique:
a. is a method of purchasing information about inspections of the country being evaluated.
b. requires the use of discriminant analysis to assess country risk.
c. involves the collection of independent opinions on country risk.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

4. The checklist approach:
a. requires several inspections of the country being evaluated.
b. requires the use of discriminant analysis to assess country risk.
c. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
d. involves the collection of independent opinions on country risk.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

5. The most important variable in determining a country’s degree of overall country risk:
a. is political risk.
b. is financial risk.
c. is the probability of a host government takeover.
d. may often vary with the country of concern.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

6. According to the text, country risk analysis has:
a. almost always detected problems before they occur.
b. been effectively used in place of capital budgeting to determine whether a project should be accepted.
c. been perfected as a result of the development of discriminant analysis.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

7. To best reduce exposure to a host government takeover, a subsidiary could:
a. use a long-run profit perspective for business in that country.
b. hire people from its own country (where the parent is located).
c. attempt to obtain supplies from its parent for which substitutes are not available.
d. borrow funds from its parent rather than from the host country’s creditors.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

8. Insurance purchased to cover the risk of expropriation ____, and will typically cover ____.
a. will be the same for all firms; only a portion of the firm’s total exposure.
b. will be the same for all firms; all of the firm’s total exposure.
c. will be dependent on the firm’s risk; all of the firm’s total exposure.
d. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

9. Country risk assessment should be used when:
a. determining whether to establish a subsidiary in a foreign country.
b. determining whether to continue business in a foreign country.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

10. When determining whether a particular proposed project in a foreign country is feasible:
a. a country risk rating can adequately substitute for a capital budgeting analysis.
b. country risk analysis should be incorporated within the capital budgeting analysis.
c. the effect of country risk on sales revenue is more important than the effect on cash flows.
d. the project with the highest country risk rating (lowest country risk) should be accepted.
e. B and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

11. The primary purpose of country risk analysis when applied to capital budgeting is usually to:
a. measure the effect of country risk on sales.
b. measure the effect of country risk on cash flows.
c. measure the effect of country risk on the consolidated balance sheet.
d. measure the effect of country risk on the consolidated income statement.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

12. If a foreign country’s consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is to:
a. use a licensing arrangement with a local firm in that country.
b. enter into a joint venture in that country.
c. develop a subsidiary (under the U.S. name) that manufactures and sells products in that country.
d. develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

13. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary’s ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:
a. the host government’s tax rates charged on remitted earnings.
b. the possibility of blocked funds.
c. the state of the economy in Germany.
d. the possibility of a withholding tax imposed by the German government.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

14. An MNC has a foreign manufacturing plant to capitalize on cheap production costs; the MNC exports all the goods produced. It should be most concerned about the country’s:
a. growth in gross domestic product.
b. government policies designed to increase tariffs on imported goods.
d. government environmental regulations and taxes on the lease or purchase of a production site.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

15. A firm may incorporate a country risk rating into the capital budgeting analysis by:
a. adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark level.
b. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

16. According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to:
a. compare each form of a country risk rating to a benchmark level.
b. estimate the effect of each form of country risk on cash flows.
c. estimate the effect of each form of country risk on the income statement and balance sheet.
d. adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

17. The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with:
a. insurance that covers losses on multilateral netting procedures.
b. exchange rate risk insurance.
c. political risk insurance.
d. guarantees that MNCs will receive the same taxation treatment by the host government as local firms.
e. guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

18. Country risk analysis is important because it:
a. focuses on whether to hedge contractual transactions.
b. focuses on the competitor firms in its industry.
c. can be used to improve the analysis used to make long-term investing decisions.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

19. ____ is (are) not a form of political risk.
a. Exchange rate movements
b. Attitude of consumers in the host country
c. Actions of the host government
d. Blockage of fund transfers
e. All of the above are forms of political risk

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

20. Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture personal computers, while MNC B is considering the establishment of a subsidiary to manufacture tanks. Which of the two MNCs is likely to be less affected by the low macro-assessment?
a. MNC A.
b. MNC B.
c. both will be equally affected, since the macro-assessment does not vary.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

21. Which of the following is not a technique to assess country risk?
a. Gamma technique.
b. Delphi technique.
c. checklist approach.
d. inspection visits.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

22. The ____ involves the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.
a. checklist approach
b. discriminant analysis
c. regression analysis
d. Delphi technique

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

23. When quantifying country risk:
a. weights should be equally allocated among factors.
b. weights should be assigned to the political and financial factors according to their perceived importance.
c. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
d. the derived factors will be identical for all MNCs conducting business in that country.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

24. Which of the following is not a strategy that could be used by an MNC to reduce its exposure to a host government takeover?
a. Attempt to recover cash flows from a foreign investment as quickly as possible
b. Rely on unique supplies and/or technology
c. Hire local labor
d. Borrow local funds
e. All of the above are strategies to reduce an MNC’s exposure to a host government takeover.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

25. MNCs can purchase insurance to cover the risk of expropriation. Which of the following is not a source of this type of insurance?
a. the World Bank.
b. the Overseas Private Investment Corporation (OPIC).
c. the International Monetary Fund (IMF).
d. all of the above are sources for insurance against expropriation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

26. Which of the following is not a way in which country risk analysis can be used?
a. to monitor countries where an MNC is currently doing business.
b. as a screening device to avoid conducting business in countries with excessive risk.
c. to revise an MNC’s financing decisions.
d. to determine the degree to which the MNC is exposed to exchange rate movements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

27. An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

28. ____ is not a political risk factor.
a. High interest rates in a foreign country
b. Currency inconvertibility
c. War
d. Corruption

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

29. A mild form of political risk is a tendency of residents to purchase only:
a. imported products.
b. locally produced products.
c. products produced by MNCs.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

30. To make an MNC’s operations coincide with its own goal, a host government could do all of the following, except:
a. require the use of local employees for managerial positions.
b. require social facilities.
c. subsidize the MNC.
d. require environmental controls.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

31. When a country’s currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

32. When the war in Iraq began in 2003, some MNCs feared that oil prices would ____ and that U.S. inflation and interest rates would ____.
a. rise; rise
b. fall; fall
c. rise; fall
d. fall; rise

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

33. Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC’s product.
a. increase; increase
b. reduce; reduce
c. increase; reduce
d. reduce; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

34. A ____ currency may ____ the volume of products imported by the country and therefore reduce the country’s production and national income.
a. weak; increase
b. weak; reduce
c. strong; increase
d. strong; reduce

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

35. Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

36. ____ involve(s) the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.
a. The checklist approach
b. The Delphi technique
c. Quantitative analysis
d. Inspection visits

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

37. Perhaps the most appropriate method for incorporating forms of country risk in a capital budgeting analysis is to estimate how the ____ would be affected by each form of risk.
a. discount rate
b. cash flows
c. opportunity cost
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Comprehension

38. Since country risk is constantly changing and events in other parts of the world are largely unpredictable, country risk analysis is not important for MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

39. A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host government.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

40. Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC’s products.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

41. When using a checklist approach to assess country risk, factors should be converted to some numerical forms and assigned equal weights.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

42. Unlike project risk, country risk cannot be incorporated into the capital budgeting analysis of a proposed project by adjustment of the discount rate or by adjustment of the estimated cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

43. After a project is accepted and implemented, country risk does not need to be monitored; since the project is already established, no further changes can be made.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

44. While an overall risk rating of a country can be useful, it cannot always detect upcoming crises.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

45. Country risk can affect an MNC’s cash flows but cannot affect its cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

46. To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.04
KEY: Bloom’s: Knowledge

47. The weights assigned to factors when assessing country risk should always be higher for the political risk factors than the financial factors.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Comprehension

48. A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

49. Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

50. U.S.-based MNCs could avoid country risk by simply avoiding international business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

51. If an MNC diversifies its operations internationally to reduce its exposure to any individual country’s problems, country risk analysis becomes irrelevant.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

52. Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC’s business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.02
KEY: Bloom’s: Knowledge

53. Adjustments to incorporate country risk into the capital budgeting analysis would involve either the addition of a risk premium to the discount rate or a reduction of the cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Comprehension

54. Country risk analysis is important because it:
a. can be used by MNCs as a screening device to avoid countries with excessive risk.
b. can be used by MNCs to monitor countries where the MNC is presently engaged in international business.
c. can be used to improve the analysis used to make long-term investing or financing decisions.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

55. Which of the following is not a form of financial risk?
a. Exchange rate movements
b. Inflation rates
c. Blockage of fund transfers
d. All of the above are forms of financial risk.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Knowledge

56. Which of the following is not an example of political risk?
a. The Japanese government requires an MNC’s subsidiary to install exercise rooms for its employees.
b. The Swiss government requires an MNC’s subsidiary to install filters in its manufacturing plants to reduce pollution.
c. Country X, considered for expansion, frequently goes to war with its neighbors.
d. Country Y’s government has recently taken over the subsidiary of one of your competitors, another U.S.-based MNC.
e. All of the above are examples of political risk.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.16.01
KEY: Bloom’s: Comprehension

57. Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis?
a. Adjusting the discount rate upward
b. Adjusting the input variables to estimate the sensitivity of the project’s NPV
c. Adjusting the political risk rating to obtain a more favorable NPV
d. Country risk should be ignored in capital budgeting, since it is a subjective analysis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.16.03
KEY: Bloom’s: Knowledge

Chapter 17—Multinational Cost of Capital and Capital Structure

1. An argument for MNCs to have a debt-intensive capital structure is:
a. they are well diversified.
b. they can reduce the chance of bankruptcy.
c. it spreads the shareholder base.
d. it forces subsidiaries to pay dividends to shareholders.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

2. According to the text, there is evidence that the debt ratios (debt/capital) of MNCs based in:
a. the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany.
b. China tend to be generally higher than MNCs headquartered in other non-U.S. countries.
c. the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

3. According to the text, the cost of capital for an international project will:
a. always be greater than the firm’s cost of capital.
b. always be less than the firm’s cost of capital.
c. always be the same as the firm’s cost of capital.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

4. Which of the following factors is not expected to generally have a favorable impact on the firm’s cost of capital according to the text?
b. high degree of international diversification.
c. high exposure to exchange rate fluctuations.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

5. The capital asset pricing theory is based on the premise that:
a. only unsystematic variability in cash flows is relevant.
b. only systematic variability in cash flows is relevant.
c. both systematic and unsystematic variability in cash flows are relevant.
d. neither systematic nor unsystematic variability in cash flows is relevant.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

6. According to the text, MNCs can:
a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Comprehension

7. The term “global” target capital structure for an MNC represents the MNC’s capital structure:
a. in the U.S.
b. relative to competitors across all countries.
c. where it has its largest subsidiary.
d. when consolidating all of its subsidiaries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

8. According to the text, an MNC’s “global” target capital structure is:
a. always debt-intensive.
b. always equity-intensive.
c. sometimes different from an MNC’s “local” capital structures (at subsidiaries).
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

9. One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC’s ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

10. One argument for why subsidiaries should be only partly-owned by the parent is:
a. that the potential conflict of interests between the MNC’s managers and shareholders is avoided.
b. that the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
c. that the potential conflict of interests between the MNC’s existing creditors is avoided.
d. to motivate subsidiary managers by allowing them partial ownership.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

11. The cost of capital incurred by U.S.-based MNCs is primarily driven by the global stock market volatility.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

12. Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.
a. young; high
b. old; high
c. old; low
d. young; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

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

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

14. Based on the factors that influence a country’s cost of capital, the cost of capital in less developed countries is likely to be ____ than that of the U.S. and ____ than that of Japan.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

15. According to the text, the cost of debt:
a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

16. The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local firms where the MNC’s subsidiary is based.
b. average capital structure of local firms where the MNC’s parent is based.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

17. The term “global capital structure” is used in the text to represent the:
a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic firms across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

18. An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Knowledge

19. Assume that the risk-free interest rate in the U.S. is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M’s firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M had the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital would be ____ than that of the U.S. firm.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Application

20. When a country’s risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.
a. increases; increases
b. increases; is not affected
c. is not affected; increases
d. is not affected; is not affected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

21. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to your text?
a. exchange rate risk.
b. size.
d. international diversification.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

22. According to your text, which of the following is not a factor that increases an MNC’s cost of capital?
a. higher exposure to exchange rate risk.
b. higher exposure to country risk.
c. an increase in the risk-free interest rate.
d. an increase in the size of the MNC.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

23. The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower
c. smaller; lower
d. A and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

24. Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

25. Which of the following is not a reason provided in the text regarding why the cost of debt can vary across countries?
a. differences in the risk-free rate.
b. a high price-earnings multiple.
c. differences in the credit risk premium.
d. differences in demographics.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

26. In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.
a. more; low
b. more; high
c. less; low
d. B and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

27. In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.
a. more; strong
b. more; weak
c. less; strong
d. less; weak
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

28. A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
a. debt
b. retained earnings
c. short-term loans
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

29. The ____ the MNC’s cost of capital, the ____ will be a project’s net present value for its proposed project with a given set of expected cash flows.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

30. To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.
a. dependent on; less
b. dependent on; more
c. independent of; less
d. independent of; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

31. In general, a firm ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.
a. more; narrower
b. less; wider
c. more; wider
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

32. According to the CAPM, the required rate of return on stock is a positive function of all of the following, except:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. the company’s earnings.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

33. The lower a project’s beta, the ____ is the project’s ____ risk.
a. lower; systematic
b. lower; unsystematic
c. higher; systematic
d. higher; unsystematic

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

34. Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematic

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

35. Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.
a. higher; MNCs
b. lower; domestic firms
c. lower; MNCs
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

36. When assuming that investors in the U.S. are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC’s project’s beta.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

37. Assume the following information for Pexi Co., a U.S.-based MNC that needs funding for a project in Germany:

U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

What is Pexi’s cost of dollar-denominated equity?
a. 12.0%.
b. 11.2%.
c. 10.0%.
d. 7.2%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

38. Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany:

U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

What is Brama’s after-tax cost of dollar-denominated debt?
a. 7.0%.
b. 4.9%.
c. 8.0%.
d. 5.6%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

39. Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
a. lower than its cost of equity.
b. higher than its cost of equity.
c. lower than the country’s risk-free rate.
d. lower than its credit risk premium.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Comprehension

40. Normally, each subsidiary of an MNC will issue its own stock where it does business.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

41. In general, an MNC’s size, its access to international capital markets, and international diversification are unfavorable to an MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

42. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

43. Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of debt in many less developed countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Comprehension

44. In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

45. The MNC’s cost of equity is unrelated to the local risk-free rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

46. Assume a subsidiary is forced to borrow in excess of the MNC’s optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

47. Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

48. Since the cost of funds can vary among markets, the MNC’s access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

49. Capital asset pricing theory would most likely suggest that the MNC’s cost of capital is lower than that of domestic firms.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

50. If an MNC’s cash flows are more stable, it can probably handle more debt than an MNC with erratic cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

51. When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

52. There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

53. An MNC’s cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

54. An MNC’s size, its access to international capital markets, and international diversification are unfavorable to an MNC’s cost of capital.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

55. The capital asset pricing model (CAPM) suggests that the required return on a firm’s stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock’s beta.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

56. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Comprehension

57. It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.05
KEY: Bloom’s: Knowledge

58. It is probably easier to estimate the cost of equity than it is to estimate the cost of debt.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Comprehension

59. An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Comprehension

60. If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent’s subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Comprehension

61. Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.
a. higher; higher
b. lower; higher
c. higher; lower
d. B and C
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

62. The capital asset pricing model suggests that the required return on a firm’s stock is a positive function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

63. The capital asset pricing model suggests that the required return on a firm’s stock is a negative function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock’s beta.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Knowledge

64. An MNC can obtain equity by all of the following except:
a. retained earnings.
b. a global equity offering.
c. a domestic equity offering.
d. none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

65. Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner’s tax rate is 40%. What is Werner’s weighted average cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.03
KEY: Bloom’s: Application

66. The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
a. 8.4%
b. 11.4%
c. 10%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.04
KEY: Bloom’s: Application

67. Which of the following is least likely to influence an MNC’s capital structure?
a. The stability of MNC’s cash flows
b. The MNC’s credit risk
d. The MNC’s decision to invest excess cash in a Treasury bill rather than in a bank

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

68. Which of the following is not a host country characteristic than can affect an MNC’s capital structure decision?
a. The strength of host country currencies
b. The country risk in host countries
c. Political decisions to increase penalties for criminals
d. Tax laws in host countries

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

69. If the parent ____ the debt of the subsidiary, the subsidiary’s borrowing capacity might be ____.
a. does not back; increased
b. backs; reduced
c. does not back; reduced
d. backs; increased
e. C and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.02
KEY: Bloom’s: Knowledge

70. ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
a. Private placements
b. Domestic equity offerings
c. Global equity offerings
d. Global debt offerings

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

71. Most MNCs obtain equity funding:
a. in foreign countries.
b. in their home country.
c. through global offerings.
d. through private placements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.17.01
KEY: Bloom’s: Knowledge

Chapter 18—Long-Term Debt Financing

1. If an MNC financed with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that:
a. exhibits a low interest rate and is expected to appreciate.
b. exhibits a low interest rate and is expected to depreciate.
c. exhibits a high interest rate and is expected to depreciate.
d. exhibits a high interest rate and is expected to appreciate.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

2. Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

3. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
a. invoicing its exports in U.S. dollars.
b. requesting that any imports ordered by the firm be invoiced in U.S. dollars.
c. invoicing its exports in euros.
d. requesting that any imports ordered by the firm be invoiced in the currency denominating the bonds.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

4. Lantana Co. conducts pays for many imports denominated in Canadian dollars. It is a major exporter to France, and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in:
a. U.S. dollars.
b. euros.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

5. Simulation is useful in the bond-denomination decision since it can:
a. precisely compute the cost of financing with bonds denominated in a single foreign currency.
b. precisely compute the cost of financing with bonds denominated in a portfolio of foreign currencies.
c. assess the probability that a bond denominated in a foreign currency will be less costly than a bond denominated in the home currency.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Knowledge

6. An interest rate swap between two firms of different countries enables the exchange of ____ for ____.
a. fixed-rate payments; floating-rate payments
b. stock; interest deductions on taxes
c. interest payments on loans; ownership of debt of less developed countries
d. interest payments on loans; stock

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

7. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
a. a foreign currency; weakens
b. dollars; strengthens
c. a foreign currency; strengthens
d. dollars; weakens

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

8. The yields offered on newly issued bonds tend to be:
a. lower in less developed countries where labor costs are low.
b. relatively high in countries such as Japan and the U.S. because the credit risk premium is much higher there than in other countries.
c. the same across countries at a give point in time.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

9. When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC’s exposure to exchange rate risk can be minimized if:
a. the parent issues dollar-denominated equity and provides the proceeds to the subsidiary.
b. the parent provides its retained earnings to the Mexican subsidiary.
c. the subsidiary obtains a dollar-denominated loan from a financial institution.
d. the subsidiary obtains a peso-denominated loan from a financial institution.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

10. A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:
a. issuing Swiss franc-denominated bonds.
d. issuing U.S. dollar-denominated bonds.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

11. A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business, and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:
a. U.S. dollars.
c. Chinese yuan.
d. a combination of Canadian dollars and Chinese yuan.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

12. If the currency denominating a foreign bond depreciates against the firm’s home currency, the funds needed to make coupon payments will increase.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

13. An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
a. convert to floating-rate debt.
b. hedge exchange rate risk.
c. lock in the interest payments on debt.
d. remove the default risk of its debt.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

14. A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
a. stock; one currency
b. stock; a portfolio of foreign currencies
c. one currency; stock options
d. one currency; another currency

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

15. Assume a U.S.-based subsidiary wants to raise \$1,000,000 by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is \$.02. Thus, the MNC needs ____ rupees to obtain the \$1,000,000 needed.
a. 50,000,000
b. 20,000
c. 1,000,000
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Application

16. An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bonds have a coupon rate of 15%. If the peso remains stable at its current level of \$.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be:
a. 10.0%.
b. 12.5%.
c. 15.0%.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

17. New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000 Russian rubles at par. The bonds have a coupon rate of 17%. If the ruble is expected to appreciate from its current level of \$.03 to \$.032, \$.034, and \$.035 in years 1, 2,and 3, respectively, what is the financing cost of these bonds?
a. 17%.
b. 23.18%.
c. 22.36%.
d. 23.39%.

18. In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ swap, two parties agree to periodically exchange foreign currencies.
a. interest rate; currency
b. currency; interest rate
c. interest rate; interest rate
d. currency; currency

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

19. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:

Fixed Rate Bond Variable Rate Bond
Good Company 10% LIBOR + 1%
Bad Company 12% LIBOR + 1.5%

Given this information:
a. an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
b. an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
c. an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Application

20. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest rates ____ substantially.
a. floating-rate; rise
b. floating-rate; fall
c. fixed-rate; rise
d. fixed-rate; fall
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

21. When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project’s risk is to:
a. apply a required return that is based on the CAPM.
b. apply a required return based on unsystematic risk.
c. derive the net present value of the equity investment.
d. apply the required return equal to the risk-free rate in the foreign country.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

22. Assume that a yield curve’s shape is caused by liquidity. An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is:
a. flat.
b. inverted.
c. upward-sloping.
d. downward sloping.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

23. If the foreign currency that was borrowed appreciates over time, an MNC will need fewer funds to cover the coupon or principal payments. [Assume the MNC has no other cash flows in that currency.]
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

24. U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary’s local currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

25. Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries is ____.
a. low; high
b. high; low
c. high; high
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

26. MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future.
a. forward contracts
b. currency swaps
c. parallel loans
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

27. An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for short-term debt than for long-term debt. The yield curve in this country reflects ____.
a. higher; several periods
b. lower; several periods
c. higher; a specific point in time
d. lower; a specific point in time

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

28. The ____ for a given country represents the annualized yield offered on debt for various maturities.
a. LIBOR
b. yield curve
c. parallel loan
d. interest rate swap

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Knowledge

29. When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.
a. short; interest rate
b. long; interest rate
c. short; exchange rate
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

30. Some MNCs use a country’s yield curve to compare annualized rates among debt maturities, so that they can choose a maturity that has a relatively low rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Comprehension

31. As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap between two parties.
a. ultraparty
b. broker
c. counterparty
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

32. In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____.
a. fixed; decline
b. floating; decline
c. floating; increase
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

33. In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
a. callable
b. putable
c. amortizing
d. zero-coupon

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

34. In a(n) ____ swap, the notional value is increased over time.
a. amortizing
b. basis
c. zero-coupon
d. accretion

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

35. A ____ gives its owner the right to enter into a swap.
a. basis swap
b. swaption
c. callable swap
d. putable swap

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

36. Foreign subsidiaries of U.S. MNCs can finance projects with dollars in order to avoid exchange rate risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

37. The actual financing cost of a U.S. corporation issuing a bond denominated in euros is affected by the euro’s value relative to the U.S. dollar during the financing period.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

38. A floating coupon rate is an advantage to the bond issuer during periods of increasing interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

39. An MNC issuing pound-denominated bonds may be completely insulated from exchange rate risk associated with the bond if its foreign subsidiary makes the coupon and principal payments of the bond with its pound receivables.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

40. If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros, it would sell euros forward.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

41. Currency swaps, whereby two parties exchange currencies at a specified point in time for a specified price, are often used by MNCs to hedge against interest rate risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

42. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

43. Many MNCs simultaneously swap interest payments and currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

44. A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Knowledge

45. Since yield curves are identical across countries, MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.03
KEY: Bloom’s: Knowledge

46. Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

47. If the currency denominating a foreign bond depreciates against the firm’s home currency over the lifetime of the bond, the funds needed to make coupon payments will increase.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

48. Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

49. If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.
a. appreciates; increase
b. depreciates; decrease
c. appreciates; decrease
d. depreciates; increase
e. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.18.02
KEY: Bloom’s: Comprehension

50. Generally, the financing costs associated with a foreign currency-denominated bond will be ____ volatile than the financing costs of a domestic bond because of ____.
a. more; exchange rate movements
b. less; exchange rate movements
c. less; global economic conditions
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.01
KEY: Bloom’s: Comprehension

51. ____ swaps are often used by companies to hedge against ____ rate risk.
a. Currency; interest
b. Interest; interest
c. Interest; exchange
d. Currency; exchange
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Comprehension

52. ____ are commonly used to hedge interest rate risk.
a. Currency swaps
b. Parallel loans
c. Interest rate swaps
d. Forward contracts
e. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

53. In a(n) ____ swap, the notional value is reduced over time.
a. accretion
b. amortizing
c. forward
d. zero-coupon
e. putable

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

54. A(n) ____ swap is entered into today, but the swap payments start at a specific future point in time.
a. accretion
b. amortizing
c. forward
d. zero-coupon
e. putable

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.18.04
KEY: Bloom’s: Knowledge

1. Which of the following is a reason why commercial banks can facilitate international trade?
a. The exporter may not wish to accept credit risk of the importer.
b. The government may impose exchange contracts that prevent payment by the importer to the exporter.
c. The exporter may need financing until payment for the goods is received.
d. All of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

2. Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:
a. accounts receivable financing.
b. consignment.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

3. Consider a bank that acknowledges that it will make payments on behalf of a computer importer after the computers are delivered to the importer. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

4. Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

5. Consider an exporter that is willing to send goods to the importer without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported goods. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

6. The all-in-rate a bank charges its customer(s) for accepting drafts includes both the discount rate and the acceptance commission.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

7. MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash.
a. factoring
c. a banker’s acceptance
d. a letter of credit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

8. The ____ was established in 1934 with the intention to facilitate Soviet-American trade.
a. Domestic International Sales Corporation (DISC)
b. Private Export Funding Corporation (PEFCO)
c. Export-Import Bank
d. Foreign Credit Insurance Association (FCIA)

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

9. A ____ provides a summary of freight charges and conveys title to the merchandise.
a. letter of credit
b. banker’s acceptance
d. bill of exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

10. According to the text, international trade activity has generally ____ over time. This should cause the popularity of trade finance techniques to ____ over time.
a. increased; increase
b. increased; decrease
c. decreased; increase
d. decreased; decrease

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

11. Which of the following payment terms provides the supplier with the greatest degree of protection?
a. letters of credit.
b. consignment.
c. prepayment.
d. drafts (sight/time).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

12. With ____, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
a. a letter of credit arrangement
b. an open account arrangement
c. a draft arrangement
d. a consignment arrangement

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

13. With ____, a bank purchases a receivable without recourse to the exporter.
a. accounts receivable financing
b. factoring
c. a banker’s acceptance
d. a letter of credit

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

14. In ____, a bank arranges to fund a loan to pay the exporter instead of charging the importer’s account immediately.
a. refinancing of a sight letter of credit
b. a banker’s acceptance
c. a short-term bank loan
d. accounts receivable financing

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

15. A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:
a. banker’s acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

16. A bill of exchange requesting the bank to pay the face amount at a future date is a:
a. banker’s acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

17. An exchange of goods between two parties under two distinct contracts expressed in monetary terms is:
a. compensation.
b. counterpurchase.
c. factoring.
d. accounts receivable financing.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

18. Which of the following is not a program of the Export-Import Bank of the U.S.?
a. working capital guarantee program.
b. project finance loan program.
c. direct loan program.
d. the foreign sales corporation program.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

19. Who bears the payment risk in a letter of credit?
a. the exporter.
b. the importer.
c. the issuing bank.
d. both the exporter and importer.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

a. restrictions imposed by the government on imports from another country.
b. restrictions imposed by the government on exports sent from the country.
c. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
d. financing provided to an exporter in exchange for goods provided to the creditor by the exporter.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

21. All types of foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country are called countertrade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

22. The exchange of goods between two parties without the use of any currency as a medium of exchange is called factoring.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

23. A draft drawn on and accepted by a bank is called a banker’s acceptance.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

24. The Direct Loan Program is administered by the:
a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

25. The Working Capital Guarantee Program is administered by the:
a. Private Export Funding Corporation (PEFCO).
b. Overseas Private Investment Corporation (OPIC).
c. Ex-Imbank.
d. Foreign Credit Insurance Association (FCIA).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

26. Which of the following is not a payment method used for international trade?
a. consignment.
b. open account.
c. factoring.
d. draft.
e. letter of credit.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

27. Under a letter of credit arrangement, the bank issuing the letter of credit is known as the ____ bank, the correspondent bank in the beneficiary’s country to which the issuing bank sends the letter of credit is known as the ____ bank, and the bank that agrees to examine documents under the letter of credit and pay the beneficiary is called the ____ bank.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

28. A(n) ____ letter of credit is not a trade-related letter of credit.
a. commercial
b. import/export
c. revocable
d. irrevocable
e. all of the above are trade-related letters of credit

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

29. Which of the following is not true regarding letters of credit?
a. They are issued by banks on behalf of the importer promising to pay the exporter.
b. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
c. They guarantee that the goods shipped are the goods purchased.
d. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

30. A banker’s acceptance is a draft drawn on and accepted by a(n) ____.
a. bank
b. importer
c. exporter
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

31. Which of the following is not true regarding a banker’s acceptance?
a. It can be beneficial to the exporter, as he does not have to worry about the credit risk of the importer.
b. It can be beneficial to the importer, as he may have greater access to foreign markets when purchasing supplies.
c. It can be beneficial to the bank accepting the draft in that it earns a commission for creating an acceptance.
d. It is a sight draft.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

32. ____ is not a type of program offered by Ex-Imbank.
a. Guarantees
b. Loans
c. Currency swap insurance
d. Bank insurance

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

33. As part of Ex-Imbank’s export credit insurance programs, a(an) ____ policy is generally issued to an administrator, such as a bank, trading company, insurance broker, or government agency, who then administers the policy for multiple exporters.
d. umbrella

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

34. The ____ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ____ is a self-sustaining government agency.
a. Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO)
b. Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC)
c. Private Export Funding Corporation (PEFCO); Ex-Imbank
d. Overseas Private Investment Corporation (OPIC); Ex-Imbank

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

35. The risk to the exporter is highest with the ____ method.
a. prepayment
b. letter of credit
c. consignment
d. open account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

36. A ____ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.
a. draft
d. letter of credit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

37. Under a(n) ____ arrangement, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
a. draft
b. consignment
c. prepayment
d. open account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

38. In ____, the exporter sells accounts receivable without recourse.
a. accounts receivable financing
b. factoring
c. working capital financing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

39. An irrevocable L/C obligates the issuing bank to honor all drawings presented in conformity with the terms of the L/C.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

40. ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
a. A standby L/C
b. A transferable L/C
c. Assignment of proceeds
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

41. The interest rate the bank charges the customer in a banker’s acceptance is referred to as the all-in rate; it entirely consists of the acceptance commission.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

42. ____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder, usually the exporter.
a. Factoring
b. Accounts receivable financing
c. Forfaiting
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

43. The term counterpurchase denotes the exchange of goods between two parties under two distinct contracts expressed in monetary terms.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

44. The Working Capital Guarantee Program and the Medium-term Guarantee Program are offered by the:
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

45. The ____ is a self-sustaining federal agency responsible for insuring direct U.S. investments in foreign countries against the risk of currency inconvertibility, expropriation, and other political risks.
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

46. Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

47. In an open account transaction, the exporter ships the goods to the importer but retains title to the goods until they have been sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

48. When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

49. From a bank’s viewpoint, issuing a letter of credit is analogous to making a loan as far as risk is concerned.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

50. There is an active secondary market for banker’s acceptances.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

51. The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

52. The Working Capital Guarantee Program of the Private Export Funding Corporation (PEFCO) encourages commercial banks to extend short-term export financing to eligible exporters by providing a comprehensive guarantee that covers 100 percent of the loan’s principal and interest.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

53. The objectives of the Export-Import Bank of the United States include the assumption of underlying credit risk and country risk to encourage private lenders to finance export trade and the provision of direct loans to foreign buyers when private lenders are unwilling to do so.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Comprehension

54. The Overseas Private Investment Corporation (OPIC) is owned by a consortium of commercial banks and industrial companies; it cooperates closely with the Export-Import Bank.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.03
KEY: Bloom’s: Knowledge

55. Under prepayment, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

56. A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

57. If shipment is made under a forfaiting draft, the exporter is paid once shipment has been made and the draft is presented to the buyer for payments.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

58. In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping documents and the collection of payment.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

59. Under a countertrade arrangement, the exporter ships the goods to the importer while retaining title to the merchandise until it is sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

60. The sale of accounts receivable to a third party for a discount is called factoring.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

61. Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

62. The payment method that affords the supplier the greatest degree of protection is the prepayment method.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

63. A bank issuing a letter of credit on behalf of an importer is obligated to honor the letter of credit regardless of the buyer’s willingness or ability to pay.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

64. If shipment is made under a time draft, the exporter is paid once shipment has been made and the draft is presented to the buyer for payment.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

65. In an open account transaction, the exporter ships the goods to the importer but retains title to the goods until they have been sold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

66. When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

67. An irrevocable letter of credit can be cancelled or amended if the beneficiary consents to it.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Knowledge

68. The bill of exchange serves as a receipt for shipment and a summary of freight charges; most importantly, it conveys title to the merchandise.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

69. Which of the following is not a payment method used for international trade?
a. Supplier credit
b. Bill of exchange
d. Letter of credit
e. All of the above are payment methods used.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

70. Under a ____, the exporter is paid once shipment has been made and the draft is presented to the buyer for payment; under a ____, the exporter provides instructions to the buyer’s bank to release shipping documents against acceptance, by the buyer, of the draft.
a. sight draft; time draft
b. sight draft; banker’s acceptance
c. bill of lading; banker’s acceptance
d. time draft; sight draft

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

71. Which of the following is not a trade financing method used in international trade from an exporter’s perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Knowledge

72. Of all the payment methods available in international trade, ____ probably affords the most protection to the exporter, while ____ probably affords the least protection.
a. prepayment; consignment
b. prepayment; open account
c. open account; prepayment
d. consignment; prepayment

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.01
KEY: Bloom’s: Comprehension

73. Which of the following is not true regarding letters of credit?
a. They are issued by banks on behalf of the importer promising to pay the exporter.
b. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
c. They guarantee that the goods shipped are the goods purchased.
d. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.19.02
KEY: Bloom’s: Comprehension

Chapter 20—Short-Term Financing

1. MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:
a. have future cash inflows in that foreign currency.
b. have future cash outflows in that foreign currency.
c. have offsetting future cash inflows and outflows in that foreign currency.
d. have no other cash flows in that foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

2. Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:
a. 8%.
b. 14.48%.
c. 2%.
d. 1.52%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

3. Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____ in order to have the same effective financing rate from borrowing dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

4. When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____.
a. foreign currency’s interest rate; appreciates
b. foreign currency’s interest rate; depreciates
c. domestic interest rate; depreciates
d. domestic interest rate; appreciates

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

5. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
a. borrowing domestically.
b. borrowing a portfolio of foreign currencies that are not highly correlated.
c. borrowing a portfolio of foreign currencies that are highly correlated.
d. borrowing two foreign currencies that are negatively correlated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

6. If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio’s effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.
a. high; low
b. high; high
c. low; low
d. low; high

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

7. Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound’s forward rate of \$1.75 equals the pound’s spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower financing cost by borrowing pounds for one year.
a. does; could
b. does; could not
c. does not; could not
d. does not; could

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

8. A risk-averse firm would prefer to borrow ____ when the expected financing costs are similar in a foreign country as in the local country.
a. locally
b. in the foreign country
c. either A or B
d. part of the funds locally, and part from the foreign country

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Knowledge

9. A firm forecasts the euro’s value as follows for the next year:

Possible
Percentage Change Probability
−2% 10%
3% 50%
6% 40%

The annual interest rate on the euro is 7%. The expected value of the effective financing rate from a U.S. firm’s perspective is about:
a. 8.436%.
b. 10.959%.
c. 11.112%.
d. 11.541%.

PTS: 1 DIF: DIFF.03 Challenging OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

10. The effective financing rate:
a. adjusts the nominal interest rate for inflation over the period of concern.
b. adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern.
c. adjusts the nominal rate for a change in foreign interest rates over the period of concern.
d. adjusts the nominal rate for the forward discount (or premium) over the period of concern.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

11. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:
a. less than the domestic interest rate.
b. greater than the domestic interest rate.
c. equal to the domestic interest rate.
d. greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

12. If interest rate parity exists, transactions costs are zero, and the forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency:
a. would be equal to the U.S. interest rate.
b. would be less than the U.S. interest rate.
c. would be more than the U.S. financing rate.
d. would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

13. Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:
a. on average, the foreign effective financing rate is greater than the domestic interest rate.
b. on average, the foreign effective financing rate is less than the domestic rate.
c. the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium.
d. the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

14. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year forward rate of the pound is \$1.97. The spot rate of the pound at the beginning of the year is \$1.95. By the end of the year, the pound’s spot rate is \$2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

15. The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.
a. lower; low
b. lower; high
c. higher; high
d. higher; low

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

16. Euronotes are underwritten by:
a. European central banks.
b. commercial banks.
c. the International Monetary Fund.
d. the Federal Reserve System.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

17. Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ\$ is \$.52, and the one-year forward rate of the NZ\$ is \$.50. At the end of the year, the spot rate is \$.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ\$ loan?

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

18. A negative effective financing rate for a U.S. firm implies that the firm:
a. will incur a loss on the project financed with the funds.
b. paid more interest on the funds than what it would have paid if it had borrowed dollars.
c. will be unable to repay the loan.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

19. A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today’s spot rate as a forecast for the franc’s spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:
a. equal to the U.S. interest rate.
b. less than the U.S. interest rate, but more than the Swiss interest rate.
c. equal to the Swiss interest rate.
d. less than the Swiss interest rate.
e. more than the U.S. interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

20. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been:
a. negative.
b. zero.
c. positive, but lower than the interest rate of their respective countries.
d. higher than the interest rate of their respective countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

21. ____ typically have maturities of less than one year.
a. Eurobonds
b. Euro-commercial paper
c. Euronotes

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

22. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.
a. payables; euros
b. receivables; euros
c. payables; dollars
d. receivables; dollars

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

23. Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is \$.25. If the spot rate of the ringgit in one year is \$.28, the dollar amount initially obtained from the loan is \$____, and \$____ are needed to repay the loan.
a. 375,000; 449,400
b. 449,400; 375,000
c. 6,000,000; 5,357,143
d. 5,357,143; 6,000,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

24. Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is \$.005. If the spot rate of the yen at maturity of the loan is \$.0035, what is the effective financing rate of borrowing yen?
a. 37.8%.
b. 51.43%.
c. −25.8%.
d. −6%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

25. ____ are free of default risk.
a. Euronotes
b. Eurobonds
c. Euro-commercial paper
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8% for one year. Also assume that the spot rate of the leu is \$.00012 and the one-year forward rate of the leu is \$.00010. The expected spot rate of the leu one-year from now is \$.00011.

26. Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?
a. 10%.
b. −10%.
c. −1%.
d. 1%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

27. Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

28. Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?
a. 6%.
b. 7%.
c. 1%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

29. Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:

Percentage Change Probability of Occurrence
−5% 20%
−3% 50%
1% 30%

If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is:
a. 27.14%.
b. 32.86%.
c. 26.10%.
d. none of the above

Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C\$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:

Currency Percentage Change Probability

Japanese yen −3.0% 60%
Japanese yen 1.0% 40%

30. Refer to Exhibit 20-2. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
a. 9.03%.
b. 7.00%.
c. 10.00%.
d. 7.59%.
e. none of the above

31. Refer to Exhibit 20-2. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?
a. 12%.
b. 30%.
c. 100%.
d. 0%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:

Mean effective financing rate of Japanese yen for six months 4%
Mean effective financing rate of Sudanese dinar for six months 1%
Standard deviation of Japanese yen’s effective financing rate .10
Standard deviation of Sudanese dinar’s effective financing rate .20
Correlation coefficient of effective financing rates of these two currencies .23

32. Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated by Cameron Corporation?
a. 3.10%.
b. 1.90%.
c. 17.00%.
d. 13.00%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

33. Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron?
a. 2.24%.
b. 14.98%.
c. 2.89%.
d. 17.00%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Application

34. If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

35. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

36. Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

37. One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

38. A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

39. If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Knowledge

40. The interest rate of euronotes is based on the T-bill rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

41. Countries with a ____ rate of inflation tend to have a ____ interest rate.
a. high; low
b. low; high
c. high; high
d. A and B are correct

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Comprehension

42. Kushter Inc. would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter’s effective financing rate next year?
a. 1.92%
b. 2.00%
c. 6.08%
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Application

43. A negative effective financing rate indicates that an MNC:
a. paid only a small amount in interested over and above the amount borrowed.
b. has been negatively affected by a large appreciation of the foreign currency.
c. actually paid fewer dollars to repay the loan than it borrowed.
d. would have been better off borrowing in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Knowledge

44. If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
a. lower than
b. greater than
c. similar to
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

45. If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate.
a. lower than
b. greater than
c. similar to
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: B | Bloom’s: Comprehension

46. Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.
a. appreciate by 0.92%.
b. depreciate by 0.92%.
c. appreciate by 1.00%.
d. depreciate by 1.00%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Application

47. Foreign financing costs in a single foreign currency ____ financing costs in dollars, and the variance of foreign financing costs over time is ____ than the variance of financing in dollars.
a. are higher than; higher than
b. can be lower or higher than; higher than
c. can be lower or higher than; lower than
d. are lower than; higher than

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

48. The degree of volatility of financing with a currency portfolio depends on only the standard deviations of effective financing rates of the individual currencies within the portfolio.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

49. An MNC’s parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.01
KEY: Bloom’s: Knowledge

50. A large firm may finance in a foreign currency to offset a net payable position in that foreign country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Knowledge

51. If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.06
KEY: Bloom’s: Comprehension

52. Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?
a. Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan.
b. Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan.
c. A U.S. firms has net receivables in Cyprus pounds.
d. A and C.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.02
KEY: Bloom’s: Analysis

53. Which of the following statement is false?
a. If interest rate parity holds, foreign financing a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing.
b. If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing.
c. If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.
d. If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

54. If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing
b. discount; higher than
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.20.04
KEY: Bloom’s: Comprehension

55. Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.
a. depreciates; 3.54
b. appreciates; 3.54
c. depreciates; 3.67
d. appreciates; 3.67

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.20.03
KEY: Bloom’s: Comprehension

Chapter 21—International Cash Management

1. The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest rate is 9 percent. If a U.S. firm creates a one-year deposit in Mexico, the Mexican peso would have to ____ against the U.S. dollar by ____ in order to make that investment have an effective yield that is achievable in the U.S.
a. appreciate; 18%
b. depreciate; 36%
c. depreciate; 14%
d. appreciate; 14%
e. depreciate; 8.5%

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

2. Assume that Subsidiaries X and Y often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help out Subsidiary Y?
a. X should lag its payments sent to Y to pay for imports from Y.
b. X should request that Y lead its payments to be sent for goods that Y sent to X.
c. A and B
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Application

3. Netting can achieve all but one of the following:
a. Cross border transactions between subsidiaries are reduced.
b. Transactions costs are reduced.
c. Currency conversion costs are reduced.
d. Transaction exposure is eliminated.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

4. Which of the following is true?
a. Some countries may prohibit netting.
b. Some countries may prohibit forms of leading and lagging.
c. A and B
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

5. According to the text:
a. banks in the U.S. are prohibited from facilitating cash transfers for MNCs.
b. banks in most non-U.S. countries are more advanced than the U.S. in facilitating cash transfers for MNCs.
c. an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

6. In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

7. Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even level of depreciation in the euro at which the U.S. and French investments would exhibit the same return to a U.S. investor is:

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

8. Assume that a U.S. investor invests in a British CD offering a six-month interest rate of 5%. Over this six-month period, the pound depreciates by 9%. The effective yield on the British CD for the U.S. investor is:
a. 14.45%.
b. −4.45%.
c. 14.00%.
d. −4.00%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

9. Assume that there are several foreign currencies that exhibit a higher interest rate than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher effective yield on a portfolio of currencies (relative to the domestic yield) if:
a. the foreign currency movements against the U.S. dollar are highly correlated.
b. the foreign currency movements against the U.S. dollar are perfectly positively correlated.
c. the foreign currency movements against the U.S. dollar exhibit low correlations.
d. none of the answers above would have any impact on the probability of a foreign cash investment generating a higher effective yield than a U.S. investment.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

10. If the international Fisher effect (IFE) exists, then a U.S. firm that has access to banks offering high interest rates in deposits denominated in foreign currencies should:
a. invest in the foreign deposits since they will, on average, generate higher effective yields than a U.S. deposit.
b. invest in the U.S. deposits since they will, on average, generate higher effective yields than a foreign deposit.
c. invest in the U.S. deposits since they will, on average, generate similar effective yields as a foreign deposit.
d. invest in the foreign deposits since they will, on average, generate similar effective yields as a U.S. deposit.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

11. The most useful measure of an MNC’s liquidity is its:
a. cash balance.
b. amount of securities held as investments.
c. political risk rating.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

12. Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the international Fisher effect will also hold.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

13. According to the international Fisher effect:
a. exchange rates adjust to compensate for income differentials between countries.
b. interest rates adjust to compensate for income differentials between countries.
c. exchange rates adjust to compensate for interest rate differentials between countries.
d. exchange rates adjust to compensate for risk differentials between countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

14. The international Fisher effect suggests that:
a. the effective yield on short-term foreign securities should, on average, equal the yield on short-term domestic securities.
b. the effective yield on short-term securities of high inflation countries is greater than the yield on short-term domestic securities.
c. if domestic income grows faster than foreign income, the effective yield on short-term foreign securities is higher than short-term domestic securities.
d. if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

15. If a foreign currency consistently depreciated against the dollar over several periods and had lower interest rates at the beginning of those periods than the U.S. interest rates, then:
a. U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those periods.
b. the international Fisher effect is supported by the results.
c. A and B
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

16. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

17. A common purpose of inter-subsidiary leading or lagging strategies is to:
a. allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds.
b. assure that the inventory levels at subsidiaries are maintained within tolerable ranges.
c. change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary.
d. measure the performance of subsidiaries according to how quickly subsidiaries remit dividend payments to the parent.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

18. Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these securities is 12%, while the interest rate on the same securities in the U.S. is 10%. The firm believes that today’s spot rate is an appropriate forecast for the spot rate of the pound in one year. Based on this information, the effective yield on British securities from the U.S. firm’s perspective is:
a. equal to the U.S. interest rate.
b. equal to the British interest rate.
c. lower than the U.S. interest rate.
d. higher than the British interest rate.
e. lower than the British interest rate, but higher than the U.S. interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

19. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:
a. negative.
b. zero.
c. positive, but less than the interest rate of their respective countries.
d. more than the interest rate of their respective countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

20. According to ____, the effective yield earned by U.S. investors will be the same as the effective yield earned by non-U.S. investors in any given period.
a. interest rate parity (IRP)
b. the international Fisher effect (IFE)
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

21. Assume Costner Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9%. At the time the loan is extended, the spot rate of the kwacha is \$.00060. If the spot rate of the kwacha in one year is \$.00056, the dollar amount initially invested in Zambia is \$____, and \$____ are paid out after one year.
a. 1,500; 1,526
b. 1,526; 1,500
c. 1,500; 1,400
d. 1,400; 1,500

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

22. Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is \$.205. If the spot rate of the rand at maturity of the investment is \$.203, what is the effective yield of investing in rand?
a. 11.08%.
b. 8.92%.
c. 10.00%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

23. Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the deposit is covered by a forward sale of dollars.
a. 10%.
b. 8%.
c. 2%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

24. Assume that you forecast the value of the euro as follows for the next year:

Percentage Change Probability of Occurrence
−2% 30%
3% 40%
5% 30%

If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:
a. 15.36%.
b. 15.70%.
c. 12.00%.
d. 14.35%.
e. none of the above

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50% of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8%. The Trinidad one-year interest rate is 10% and the Japanese one-year interest rate is 7%. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:

Currency Percentage Change Probability

Japanese yen −2.0% 45%
Japanese yen 1.0% 55%

25. Refer to Exhibit 21-1. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?
a. 6.47%.
b. 8.84%.
c. 8.50%.
d. none of the above

26. Refer to Exhibit 21-1. What is the probability that the yield of the two-currency portfolio is less than the domestic yield?
a. .1575.
b. .35.
c. .6425.
d. 1.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

Exhibit 21-2
Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR) and Romanian leu (ROL) for a three-month period. Moore would like to determine the expected yield and the variance of a portfolio consisting of 40% ringgit and 60% leu. Moore has identified the following information:

Mean effective financing rate of Malaysian ringgit for three months 3%
Mean effective financing rate of Romanian leu for three months 2%
Standard deviation of Malaysian ringgit’s effective financing rate .15
Standard deviation of Romanian leu’s effective financing rate .07
Correlation coefficient of effective financing rates of these two currencies .19

27. Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?
a. 2.50%.
b. 2.60%.
c. 2.40%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

28. Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by Moore Corporation?
a. .624%.
b. 7.950%.
c. 1.040%.
d. 10.200%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

29. Lockboxes are post office box numbers assigned to employees for picking up their paychecks.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

30. Preauthorized payment is an arrangement that allows a corporation to charge a customer’s bank account up to some limit.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

31. Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

32. Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Comprehension

33. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

34. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.01
KEY: Bloom’s: Comprehension

35. A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.01
KEY: Bloom’s: Knowledge

36. To ____, MNCs can use preauthorized payments.
a. accelerate cash inflows
b. minimize currency conversion costs
c. manage blocked funds
d. manage intersubsidiary cash transfers

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

37. ____ may complicate cash flow optimization.
a. The use of a zero-balance account
b. Government restrictions
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

38. MNCs often use ____ to invest excess cash while retaining liquidity.
a. international bond markets
b. international equity markets
c. international money markets
d. the market for acquisitions

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Knowledge

39. Centralized cash management is more complicated when the MNC uses multiple currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

40. In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.03
KEY: Bloom’s: Knowledge

41. Since each subsidiary may be more concerned with its own operations than with the overall operations of the MNC, a centralized management group may need to monitor the parent-subsidiary and intersubsidiary cash flows.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Comprehension

42. A currency portfolio’s variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

43. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

44. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

45. The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.
a. inflation rate; exchange rate movements
b. income level; interest rates
c. interest rates; exchange rate movements
d. interest rates; amount invested

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

46. Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is \$0.205. If the spot rate of the rand at maturity of the investment is \$0.203, what is the effective yield of investing in rand?
a. 11.08%
b. 8.93%
c. 10.00%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

47. Which of the following statements is false?
a. If interest rate parity exists, covered interest arbitrage is not worthwhile.
b. If interest rate parity holds and the forward rate is an accurate forecast of the future spot rate, an uncovered investment in a foreign security is not worthwhile.
c. If interest rate parity exists and the forward rate is an unbiased forecast of the future spot rate, an uncovered investment in a foreign security will on average earn an effective yield similar to an investment in a domestic security.
d. If interest rate parity exists and the forward rate is expected to underestimate the future spot rate, an uncovered investment in a foreign security is expected to earn a lower effective yield than an investment in a domestic security.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

48. If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage is feasible for investors residing in the ____ country.
b. discount; home
d. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Comprehension

49. Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.
a. depreciates; 1.77
b. appreciates; 1.74
c. appreciates; 1.77
d. depreciates; 1.74

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.21.04
KEY: Bloom’s: Application

50. Which of the following is not a technique to optimize cash flows?
a. Accelerate cash inflows
b. Minimize currency conversion costs
c. Manage blocked funds
d. All of the above are techniques to optimize cash flows

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

51. A ____ allows customers to send payments to a post office box number.
a. bilateral netting system
b. multilateral netting system
c. lockbox
d. preauthorized payment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.21.02
KEY: Bloom’s: Knowledge

# FIN 535 Week 11 Final Exam – Strayer University New

FIN/535 Week 11 Final Exam – Strayer New

http://budapp.net/FIN-535-Final-Exam-Week-11-Strayer-NEW-FIN535W11E.htm

Chapters 8 Through 21

Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates

1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
a. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
b. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
c. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
d. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.

2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
a. a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

3. The international Fisher effect (IFE) suggests that:
a. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

5. Because there are sometimes no substitutes for traded goods, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C

6. According to the IFE, if British interest rates exceed U.S. interest rates:
a. the British pound’s value will remain constant.
b. the British pound will depreciate against the dollar.
c. the British inflation rate will decrease.
d. the forward rate of the British pound will contain a premium.
e. today’s forward rate of the British pound will equal today’s spot rate.

7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:
a. the nominal interest rates of both countries are the same.
b. the inflation rates of both countries are the same.
c. the exchange rates of both countries will move in a similar direction against other currencies.
d. none of the above

8. Given a home country and a foreign country, purchasing power parity suggests that:
a. the inflation rates of both countries will be the same.
b. the nominal interest rates of both countries will be the same.
c. A and B
d. none of the above

9. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. the value of the euro would often appreciate against the dollar.
b. the value of the euro would often depreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

10. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
b. some corporations with excess cash could have generated profits on average from covered interest arbitrage.
c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.

11. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:
a. the income differential.
b. the forward discount or premium.
c. the inflation differential.
d. none of the above

12. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
a. 2%.
b. 3%.
c. −2%.
d. 5%.
e. 8%.

13. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
a. follows their exchange rate movement.
b. is due to their inflation differentials.
c. is zero.
d. is constant over time.
e. C and D

14. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.
a. 2 percentage points above; depreciate by about 2%
b. 3 percentage points above; depreciate by about 3%
c. 3 percentage points below; appreciate by about 3%
d. 3 percentage points below; depreciate by about 3%
e. 2 percentage points below; appreciate by about 2%

15. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.
a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%

16. Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
a. lower U.S. inflation; depreciate
b. lower U.S. inflation; appreciate
c. higher U.S. inflation; depreciate
d. higher U.S. inflation; appreciate

17. According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.
a. lower; strengthen
b. lower; weaken
c. higher; weaken
d. higher; strengthen

18. If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.
a. greater than
b. less than
c. equal to
d. answer is dependent on whether the forward rate has a discount or premium

19. The Fisher effect is used to determine the:
a. real inflation rate.
b. real interest rate.
c. real spot rate.
d. real forward rate.

20. Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:
a. interest rate parity.
b. locational arbitrage.
d. the exchange rate mechanism.

21. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.
a. appreciate; 4.85
b. depreciate; 3,11
c. appreciate; 3.11
d. depreciate; 4.85

22. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is \$0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:
a. \$0.0076.
b. \$0.0073.
c. \$0.0070.
d. \$0.0066.

23. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; appreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

24. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 2. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

25. Which of the following is indicated by research regarding purchasing power parity (PPP)?
a. PPP clearly holds in the short run.
b. Deviations from PPP are reduced in the long run.
c. PPP clearly holds in the long run.
d. There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

26. The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is \$1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:
a. \$1.47.
b. \$1.53.
c. \$1.43.
d. \$1.57.

27. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____ by about ____%, according to the international Fisher effect (IFE).
a. depreciate; 2.9
b. appreciate; 2.9
c. depreciate; 1.0
d. appreciate; 1.0
e. none of the above

28. There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect.
a. True
b. False

29. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

30. The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
a. True
b. False

31. According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

32. Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.
a. True
b. False

33. The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.
a. True
b. False

34. If the IFE theory holds, that means that covered interest arbitrage is not feasible.
a. True
b. False

35. If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.
a. True
b. False

36. Interest rate parity can only hold if purchasing power parity holds.
a. True
b. False

37. If interest rate parity holds, then the international Fisher effect must hold.
a. True
b. False

38. Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

39. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

40. Which of the following theories can be assessed using data that exists at one specific point in time?
b. international Fisher effect (IFE).
c. A and B
d. interest rate parity (IRP).

41. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
a. absolute form of PPP.
b. relative form of PPP.
c. international Fisher effect (IFE).
d. interest rate parity (IRP).

42. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 1. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

43. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

44. Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound’s spot exchange rate should ____ by about ____ over the year.
a. depreciate; 1.9%
b. appreciate; 1.9%
c. depreciate; 3.94%
d. appreciate; 3.94%

45. According to the international Fisher effect (IFE):
a. the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
b. the exchange rate adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
c. the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
d. the percentage change in the foreign spot exchange rate will be negative if foreign interest rate is lower than the local interest rate.

46. Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have \$100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro’s spot exchange rate is \$1.40. What will be the yield on your investment if you invest in euros?
a. 8%
b. 5%
c. 3%
d. 2.78%

47. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have \$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is \$0.689. What will be the yield on your investment if you invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%

48. Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?
a. real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
b. real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
c. real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
d. IFE doesn’t hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.

49. The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.
a. True
b. False

50. If purchasing power parity holds, then the Fisher effect must also hold.
a. True
b. False

51. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets.
a. True
b. False

52. Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one-year put option for \$.03 per unit on Australian dollars at a strike price of \$0.72. Today the Australian dollar is quoted at \$0.70. You believe that purchasing power parity holds. You should accept the offer.
a. True
b. False

53. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.
a. 3.43%
b. 5.68%
c. 6.5%
d. 7.3%

54. Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.
a. True
b. False

55. According to the international fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
a. True
b. False

56. According to purchasing power parity (PPP), if a foreign country’s inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.
a. True
b. False

57. According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.
a. True
b. False

58. The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is \$0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be
a. \$0.0078.
b. \$0.0082.
c. \$0.0111.
d. \$0.00492.
e. None of the above

59. Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ\$).
a. reduce; increase; appreciation
b. increase; reduce; depreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation

60. The following regression was conducted for the exchange rate of the Cyprus pound (CYP):

Regression results indicate that a0 = 0 and a1 = 2. Therefore,
b. purchasing power parity overestimated the exchange rate change during the period under examination.
c. purchasing power parity underestimated the exchange rate change during the period under examination.
d. purchasing power parity will overestimate the exchange rate change of the Cyprus pound in the future.

61. Among the reasons that purchasing power parity (PPP) does not consistently occur are:
a. exchange rates are affected by interest rate differentials.
b. exchange rates are affected by national income differentials and government controls.
c. supply and demand may not adjust if no substitutable goods are available.
d. all of the above are reasons that PPP does not consistently occur.

62. Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. PPP suggests that a currency’s spot rate will change according to inflation differentials.
c. The IFE suggests that a currency’s spot rate will change according to interest rate differentials.
d. All of the above are true.

Chapter 9—Forecasting Exchange Rates

1. Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

2. Which of the following forecasting techniques would best represent sole use of today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

3. Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

4. Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro’s future currency value?
a. fundamental forecasting.
b. market-based forecasting.
c. technical forecasting.
d. mixed forecasting.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

5. If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
a. underestimated the future exchange rates over time.
b. overestimated the future exchange rates over time.
c. forecasted future exchange rates accurately.
d. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

6. According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:
a. currencies exhibited about the same mean forecast errors as a percent of the realized value.
b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies.
c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

7. Assume the following information:

Predicted Value of Realized Value of
Period New Zealand Dollar New Zealand Dollar
1 \$.52 \$.50
2 .54 .60
3 .44 .40
4 .51 .50

Given this information, the mean absolute forecast error as a percentage of the realized value is about:
a. 1.5%.
b. 26%.
c. 6%.
d. 6.5%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

8. If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.
a. technical forecast technique
b. fundamental forecast technique
c. all of the above
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

9. Which of the following is true?
a. Forecast errors cannot be negative.
b. Forecast errors are negative when the forecasted rate exceeds the realized rate.
c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

10. Which of the following is true according to the text?
a. Forecasts in recent years have been very accurate.
b. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
c. Forecasting errors are smaller when focused on longer term periods.
d. None of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

11. A fundamental forecast that uses multiple values of the influential factors is an example of:
a. sensitivity analysis.
b. discriminant analysis.
c. technical analysis.
d. factor analysis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

12. When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):
a. lagged input.
b. instantaneous input.
c. simultaneous input.
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

13. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

14. Which of the following is not a limitation of fundamental forecasting?
a. uncertain timing of impact.
b. forecasts are needed for factors that have a lagged impact.
c. omission of other relevant factors from the model.
d. possible change in sensitivity of the forecasted variable to each factor over time.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

15. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today’s spot rate of the Mexican peso is \$.20. What is the approximate five-year forecast of the peso’s spot rate if the five-year forward rate is used as a forecast?
a. \$.131.
b. \$.226.
c. \$.262.
d. \$.140.
e. \$.174.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

16. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today’s spot rate of the Canadian dollar is \$.80. The spot rate forecasted for one year ahead is:
a. \$.860.
b. \$.848.
c. \$.740.
d. \$.752.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

17. If today’s exchange rate reflects all relevant public information about the euro’s exchange rate, but not all relevant private information, then ____ would be refuted.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

18. According to the text, research generally supports ____ in foreign exchange markets.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

19. Assume that the U.S. interest rate is 11 percent, while Australia’s one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
a. depreciation in the Australian dollar’s value over the next year.
b. appreciation in the Australian dollar’s value over the next year.
c. no change in the Australian dollar’s value over the next year.
d. information on future interest rates is needed to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

20. If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:
a. covered interest arbitrage is feasible.
b. the international Fisher effect (IFE) is supported.
c. the international Fisher effect (IFE) is refuted.
d. the average absolute error from forecasting would equal zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

21. Which of the following is not a forecasting technique mentioned in your text?
a. accounting-based forecasting.
b. technical forecasting.
c. fundamental forecasting.
d. market-based forecasting.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

22. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is:
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

23. The following regression model was estimated to forecast the value of the Indian rupee (INR):

INRt = a0 + a1INTt + a2INFt − 1 + t,

where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = −.5; and a2 = .8. Assume that INFt − 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
30% −2%
40% −3%
30% −4%

The expected change in the Indian rupee in period t is:
a. 3.40%.
b. 0.40%.
c. 3.10%.
d. 1.70%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

24. Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A\$). Listed below are the forecasted and realized values for the last period:

Currency Forecasted Value Realized Value
Australian dollar \$.60 \$.55
Japanese yen \$.0067 \$.0069

According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.
a. more accurate than
b. less accurate than
c. more biased than
d. the same as

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

25. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the pound in year t and Ft − 1 is the forward rate of the pound in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

26. Which of the following is not a method of forecasting exchange rate volatility?
a. using the absolute forecast error as a percentage of the realized value.
b. using the volatility of historical exchange rate movements as a forecast for the future.
c. using a time series of volatility patterns in previous periods.
d. deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

27. If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.
a. weaken; delay
b. weaken; expedite
c. appreciate; expedite
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

28. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.
a. appreciate; depreciate
b. appreciate; appreciate
c. depreciate; depreciate
d. depreciate; appreciate

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

29. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.
a. depreciate by .8%; today
b. depreciate by .8%; tomorrow
c. appreciate by .8%; today
d. appreciate by .8%; tomorrow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

30. Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

31. Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:

eurot = b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1

The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.
a. appreciation; 3.4
b. depreciation; 3.4
c. appreciation; 0.7
d. appreciation; 1.2

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

32. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is \$1.03. Using purchasing power parity, the expected spot rate at the end of one year is \$____.
a. 1.02
b. 1.03
c. 1.04
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

33. If the one-year forward rate for the euro is \$1.07, while the current spot rate is \$1.05, the expected percentage change in the euro is ____%.
a. 1.90
b. 2.00
c. −1.87
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

34. If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.
a. spot; high
b. spot; low
c. forward; high
d. forward; low

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

35. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and spot rate will provide ____ forecasts.
a. substantial; similar
b. substantial; very different
c. close to zero; similar
d. close to zero; very different

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

36. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.
a. technical
b. fundamental
c. market-based
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

37. Silicon Co. has forecasted the Canadian dollar for the most recent period to be \$0.73. The realized value of the Canadian dollar in the most recent period was \$0.80. Thus, the absolute forecast error as a percentage of the realized value was ____%.
a. 9.6
b. −9.6
c. 8.8
d. −8.8

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Application

38. The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.
a. lower; volatile
b. higher; stable
c. lower; stable
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

39. If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

40. Foreign exchange markets are generally found to be at least ____ efficient.
a. weak-form
b. semistrong-form
c. strong form
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

41. MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

42. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

43. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

44. A regression analysis of the Australian dollar value on the inflation differential between the U.S. and Australia produced a coefficient of .8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by .8%.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

45. The most sophisticated forecasting techniques provide consistently accurate forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

46. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

47. Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

48. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

49. The closer graphical points are to the perfect forecast line, the better is the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

50. Foreign exchange markets appear to be strong-form efficient.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

51. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

52. Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate’s implied standard deviation from the currency option pricing model.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

53. Market-based forecasting involves the use of historical exchange rate data to predict future values.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

54. Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

55. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

56. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

57. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

58. If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today’s exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

59. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Comprehension

60. The potential forecast error is larger for currencies that are more volatile.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

61. A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

62. In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

63. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.
a. higher; to hedge
b. lower; not to hedge
c. higher; not to hedge
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

64. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Comprehension

65. The following is not a limitation of technical forecasting:
a. It’s not suitable for long-term forecasts of exchange rates.
b. It doesn’t provide point estimates or a range of possible future values.
c. It cannot be applied to currencies that exhibit random movements.
d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

66. The following regression model was estimated to forecast the percentage change in the Australian Dollar (AUD):

AUDt = a0 + a1INTt + a2INFt − 1 + t,

where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = −.8; and a2 = .5. Assume that INFt − 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
20% −3%
80% −4%

There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.
a. 4.5%; 6.1%;
b. 6.1%; 4.5%
c. 4.5%; 5.3%
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

67. Purchasing power parity is used in:
a. technical forecasting.
b. fundamental forecasting.
c. market-based accounting.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

68. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.
b. higher; sell; downward
c. higher; sell; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

69. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.
a. lower; sell; upward
b. lower; sell; downward
c. higher; sell; upward
d. higher; sell; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

70. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
a. appreciation of yen’s value over the next year.
b. depreciation of yen’s value over the next year.
c. no change in yen’s value over the next year.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

71. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
a. appreciation of pound’s value over the next year.
b. depreciation of pound’s value over the next year.
c. no change in pound’s value over the next year.
d. not enough information to answer this question.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

72. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

73. If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:
a. weak-form efficient.
b. semistrong-form efficient.
c. strong-form efficient.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

74. Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft − 1 + t,

where St is the spot rate of the yen in year t and Ft − 1 is the forward rate of the yen in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

75. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is \$.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
a. \$.840
b. \$.890
c. \$.856
d. \$.854

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

76. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?
a. to decide in which foreign market to invest the excess cash.
b. to decide where to borrow at the lowest cost.
c. to determine whether to require the subsidiary to remit the funds or invest them locally.
d. to speculate on the exchange rate movements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.01
KEY: Bloom’s: Knowledge

77. Sensitivity analysis allows for all of the following except:
a. accountability for uncertainty.
b. focus on a single point estimate of future exchange rates.
c. development of a range of possible future values.
d. consideration of alternative scenarios.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

78. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

79. A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the U.S. and Canada was −0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
a. increases; increases
b. decreases; increases
c. increases; decreases
d. increases; decreases

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Comprehension

80. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

81. Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

82. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

83. Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

84. Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

85. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and spot rate will provide similar forecasts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

86. Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Knowledge

87. Forecast errors tend to be large for short forecast horizons.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.03
KEY: Bloom’s: Knowledge

88. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

MYRt = a0 + a1INCt − 1 + a2INFt − 1 + t,

where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is
a. 4.60%.
b. −1.80%.
c. 5.2%.
d. −4.60%.
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

89. Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of \$0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:
a. \$0.023.
b. \$0.021.
c. \$0.020.
d. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

90. Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.
a. appreciate; 16.22
b. depreciate; 16.22
c. appreciate; 6.66
d. depreciate; 6.66
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

91. The one-year forward rate of the British pound is \$1.55, while the current spot rate is \$1.60. Based on the forward rate, what is the expected percentage change in the British pound over the next year?
a. +5.0%
b. −3.1%
c. +3.1%
d. +3.2%
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.09.02
KEY: Bloom’s: Application

92. Which of the following is not a method of forecasting exchange rate volatility?
a. Using the absolute forecast error as a percentage of the realized value to improve your forecast.
b. Using the volatility of historical exchange rate movements as a forecast for the future.
c. Using a time series of volatility patterns in previous periods.
d. Deriving the exchange rate’s implied standard deviation from the currency option pricing model.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.09.04
KEY: Bloom’s: Knowledge

Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1. Translation exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

2. Transaction exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

3. Economic exposure refers to:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.
e. the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
a. Diz Co.
b. Yanta Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co.
b. Kriner Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Analysis

6. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

7. Which of the following operations benefits from appreciation of the firm’s local currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
b. receiving earnings dividends from foreign subsidiaries.
c. purchasing supplies locally rather than overseas.
d. exporting to foreign countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

8. Which of the following operations benefit(s) from depreciation of the firm’s local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

9. Economic exposure can affect:
a. MNCs only.
b. purely domestic firms only.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

10. Under FASB 52:
a. translation gains and losses are included in the reported net income.
b. translation gains and losses are included in stockholder’s equity.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

11. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of \$1 million cash outflows in francs and the equivalent of \$1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.
a. strong dollar; favorably
b. weak dollar; not
c. strong dollar; not
d. weak dollar; favorably

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

12. A U.S. MNC has the equivalent of \$1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.
a. weak; somewhat stable
b. weak; favorably affected
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

13. Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about \$.40 while the present exchange rate of the DK is \$.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. not; stronger
c. favorably; weaker
d. not; weaker
e. B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

15. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.
a. favorably; favorably affected but by a smaller degree
b. favorably; favorably affected by a higher degree
c. unfavorably; favorably affected
d. favorably; unfavorably affected

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm’s local currency should:
a. increase local sales as it reduces foreign competition in local markets.
b. increase the firm’s exports denominated in the local currency.
c. increase the returns earned on the firm’s foreign bank deposits.
d. increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm’s local currency should:
a. decrease local sales as foreign competition in local markets is reduced.
b. decrease the firm’s exports denominated in the local currency.
c. decrease the returns earned on the firm’s foreign bank deposits.
d. decrease the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

18. If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against the dollar on ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPt) and the percentage change in the peso’s value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod.
a. negative; positive
b. positive; positive
c. positive; negative
d. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Analysis

20. A set of currency cash inflows is more volatile if the correlations are low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

21. Which of the following is not a form of exposure to exchange rate fluctuations?
a. transaction exposure.
b. credit exposure.
c. economic exposure.
d. translation exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

22. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A\$1,000,000, while Subsidiary B has net outflows in Australian dollars of A\$1,500,000. The expected exchange rate of the Australian dollar is \$.55. What is the net inflow or outflow as measured in U.S. dollars?
a. \$500,000 outflow.
b. \$500,000 inflow.
c. \$275,000 inflow.
d. \$275,000 outflow.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

23. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is \$1.05.
a. \$3,675,000 outflow
b. \$525,000 outflow
c. \$525,000 inflow
d. \$210,000 outflow

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Application

24. One argument for exchange rate irrelevance is that:
a. MNCs can hedge exchange rate exposure much more effectively than individual investors.
b. investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
c. purchasing power parity does not hold very well.
d. MNCs are typically not diversified across numerous countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

25. ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
a. Transaction
b. Economic
c. Translation
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

26. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC’s transaction exposure is relatively ____.
a. negatively; high
b. negatively; low
c. positively; low
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

27. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs’ transaction exposure is ____ if the two currencies are ____ correlated.
a. high; positively
b. low; negatively
c. high; negatively
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).

28. Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?
a. −0.5%
b. −2.2%
c. −1.5%
d. −1.2%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

29. Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is \$1.01.
a. −\$75,750.
b. −\$60,600.
c. −\$111,100.
d. −\$25,250.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:
a. the expected percentage change in the currency for the next day.
b. the standard deviation of the daily percentage changes in the currency over a previous period.
c. the current level of interest rates.
d. the confidence level used.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today’s spot rates, the dollar value of the funds to be received is estimated at \$500,000 for the euros and \$300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

31. Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%.
b. 5.44%.
c. 17.98%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

32. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
a. −9.00%.
b. −30.00%.
c. −5.00%.
d. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

33. Appreciation in a firm’s local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
a. reduction; reduction
b. increase; increase
c. increase; reduction
d. reduction; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

34. In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.
a. be hurt by; appreciated
b. benefit from; depreciated
c. be hurt by; depreciated
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

35. The ____ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ____ the percentage of a given financial statement item that is susceptible to translation exposure.
a. greater; smaller
b. smaller; greater
c. greater; greater
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

36. Under FASB 52, consolidated earnings are sensitive to the functional currency’s weighted average exchange rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

37. If the U.S. dollar appreciates, an MNC’s:
a. U.S. sales will probably decrease.
b. exports denominated in U.S. dollars will probably increase.
c. interest owed on foreign funds borrowed will probably increase.
d. exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

38. Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of 2. This indicates that:
a. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by 2%.
b. if the foreign currency appreciates by 1%, Mill’s cash flows will decline by .2%.
c. if the foreign currency depreciates by 1%, Mill’s cash flows will increase by 2%.
d. if the foreign currency depreciates by 1%, Mill’s cash flows will decline by 2%.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

39. ____ is (are) not a determinant of translation exposure.
a. The MNC’s degree of foreign involvement
b. The locations of foreign subsidiaries
c. The local (domestic) earnings of the MNC
d. The accounting methods used

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

40. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):

PCFt = a0 + a1et + t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Regression Coefficient (a1) Regression Coefficient (a1)
Currency Earlier Subperiod Recent Subperiod
Australian dollar (A\$) −.80 .10
Sudanese dinar (SDD) .20 .25

Based on these results, which of the following statements is probably not true?
a. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
b. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
e. All of the above are true.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Application

41. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 5.13%.
b. 2.63%.
c. 4.33%.
d. 5.55%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

42. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC’s funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:
a. 17.28%.
b. 13.15%.
c. 14.50%.
d. 12.04%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

43. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Knowledge

44. Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

45. A firm’s transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

46. Two highly negatively correlated currencies move in tandem almost as if they are the same currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

47. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

48. The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

49. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

50. If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

51. An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

52. Assume a regression model in which the dependent variable is the firm’s stock price percentage change, and the independent variable is percentage change in the foreign currency. The coefficient is negative. This implies that the company’s stock price increases if the foreign currency appreciates.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

53. A company may become more exposed or sensitive to an individual currency’s movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.01
KEY: Bloom’s: Comprehension

54. Regression analysis cannot be used to assess the sensitivity of a company’s performance to economic conditions because economic conditions are unpredictable.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

55. A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

56. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

57. The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations is known as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

58. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

59. A reduction in hedging will probably reduce transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

60. The VAR method presumes that the distribution of exchange rate movements is normal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

61. The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

62. If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

63. Some MNCs are subject to economic exposure without being subject to transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

64. If positions in a specific currency among an MNC’s subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC’s overall exposure.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

66. Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.
a. increase; decrease
b. decrease; increase
c. increase; stay the same
d. stay the same; stay the same

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

67. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is \$.012 while the present exchange rate of the British pound is \$1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:
a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
c. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.
d. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

68. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. favorably; weaker
c. not; stronger
d. not; weaker

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

69. If a U.S. firm’s cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

70. If a U.S. firm’s sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm’s ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; interest expenses
d. negative; gross profit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

71. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:
a. economic exposure.
b. translation exposure.
c. transaction exposure.
d. no exposure to exchange rate fluctuations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

72. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except:
a. the interest rate in the country of the subsidiary.
b. proportion of business conducted by the subsidiary.
c. its accounting method.
d. the exchange rate movements of the subsidiary’s currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

73. Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is −2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is \$1.23.
a. −\$38,468
b. −\$21,371
c. −\$17,097
d. −\$4,274

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

74. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is \$1.35.
a. −\$4,303
b. −\$7,830
c. −\$5,873
d. −\$1,958

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Application

75. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:
a. transaction exposure.
b. economic exposure.
c. translation exposure.
d. all of the above.

PTS: 1 DIF: Moderate
KEY: Bloom’s: Application

76. Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary’s revenue will ____, and its expenses will ____.
a. increase; decrease
b. decrease; remain unchanged
c. decrease; increase
d. increase; remain unchanged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

77. Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen’s depreciation.
a. decrease
b. increase
c. remain unchanged
d. A and C are possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

78. If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

79. A purely domestic firm is never exposed to exchange rate fluctuations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

80. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

81. Currency correlations are generally negative.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Knowledge

82. Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

83. The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

84. The degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

85. Purely domestic firms are never affected by economic exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Knowledge

86. Translation exposure affects an MNC’s cash flows.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Knowledge

87. Since earnings can affect stock prices, many MNCs are concerned about translation exposure.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
KEY: Bloom’s: Comprehension

88. Which of the following is not true regarding currency correlations?
a. Two highly positively correlated currencies act almost as if they are the same currency.
b. If two inflow currencies are highly positively correlated transaction exposure is somewhat offset.
c. If two inflow currencies are negatively correlated transaction exposure is somewhat offset.
d. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.02
KEY: Bloom’s: Comprehension

89. If the U.S. dollar appreciates,
a. an MNC’s U.S. sales will probably decrease.
b. an MNC’s exports denominated in U.S. dollars will probably increase.
c. an MNC’s interest owed on foreign funds borrowed will probably increase.
d. an MNC’s exports denominated in foreign currencies will probably increase.
e. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

90. Which of the following is not true regarding economic exposure?
a. Even purely domestic firms can be affected by economic exposure.
b. In general, depreciation of the firm’s local currency causes a decrease in both cash inflows and outflows.
c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.
d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.03
KEY: Bloom’s: Comprehension

Chapter 11—Managing Transaction Exposure

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

3. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = \$.40
Swiss franc spot rate = \$.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?
a. \$234,000.
b. \$238,584.
c. \$240,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

4. Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = \$.40
New Zealand dollar spot rate = \$.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ\$ and expects to receive NZ\$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
a. \$238,584.
b. \$240,000.
c. \$234,000.
d. \$236,127.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

5. An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
b. use the forward market to sell forward whatever currencies you will receive.
c. use the forward market to buy forward whatever currencies you will receive.
d. B and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. sell a currency call option in British pounds.
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

8. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:
a. a money market hedge.
c. a forward purchase of euros.
e. selling euro call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

9. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:
a. a money market hedge.
b. a forward sale of yen.
e. selling yen put options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

10. The real cost of hedging payables with a forward contract equals:
a. the nominal cost of hedging minus the nominal cost of not hedging.
b. the nominal cost of not hedging minus the nominal cost of hedging.
c. the nominal cost of hedging divided by the nominal cost of not hedging.
d. the nominal cost of not hedging divided by the nominal cost of hedging.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

11. From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.
a. negative; positive
b. zero; positive
c. zero; zero
d. positive; negative
e. negative; negative

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

12. Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is \$2.02, the 180-day forward rate is \$2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.
a. \$391,210.
b. \$396,190.
c. \$388,210.
d. \$384,761.
e. none of the above

13. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
a. can; can
b. can; cannot
c. cannot; can
d. cannot; cannot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

15. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = \$.61
Spot rate = \$.60
Expected spot rate in 30 days = \$.56
30-day forward rate = \$.62

a. \$630,000.
b. \$610,000.
c. \$600,000.
d. \$590,000.
e. \$580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

16. A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.
a. long-term forward contract
b. currency option contract
c. parallel loan
d. money market hedge

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

17. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.
a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. A and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

Assume the forward rate of the Swiss franc is \$.50 and the spot rate of the Swiss franc is \$.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days.
a. \$101,904
b. \$101,923
c. \$98,769
d. \$96,914
e. \$92,307

19. The forward rate of the Swiss franc is \$.50. The spot rate of the Swiss franc is \$.48. The following interest rates exist:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:
a. \$101,904.
b. \$101,923.
c. \$98,770.
d. \$96,914.
e. \$92,307.

20. Your company will receive C\$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is \$.80. If you use a forward hedge, you will:
b. receive \$750,000 in 90 days.
c. pay \$750,000 in 90 days.
e. receive \$480,000 in 90 days.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

21. A call option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.03 per unit. A put option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date, and a premium of \$.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be \$1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
a. \$1,169,000.
b. \$1,099,000.
c. \$1,106,000.
d. \$1,143,100.
e. \$1,134,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

22. Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of \$1.68, a 90-day expiration date, and a premium of \$.04. A put option exists on British pounds, with an exercise price of \$1.69, a 90-day expiration date, and a premium of \$.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be \$1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.
a. \$360,000.
b. \$338,000.
c. \$332,000.
d. \$336,000.
e. \$344,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

23. Assume that Kramer Co. will receive SF800,000 in 90 days. Today’s spot rate of the Swiss franc is \$.62, and the 90-day forward rate is \$.635. Kramer has developed the following probability distribution for the spot rate in 90 days:

Possible Spot Rate
in 90 Days Probability
\$.61 10%
\$.63 20%
\$.64 40%
\$.65 30%

The probability that the forward hedge will result in more dollars received than not hedging is:
a. 10%.
b. 20%.
c. 30%.
d. 50%.
e. 70%.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

24. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S\$) in 180 days. Today’s spot rate of the S\$ is \$.50, and the 180-day forward rate is \$.53. A call option on S\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on S\$ exists, with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.53 60%
\$.55 30%

The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
a. 0%
b. 10%
c. 30%
d. 40%
e. 70%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ\$) in 180 days. Today’s spot rate of the NZ\$ is \$.50, and the 180-day forward rate is \$.51. A call option on NZ\$ exists, with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on NZ\$ exists with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
\$.48 10%
\$.49 60%
\$.55 30%

The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

26. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a. index
b. futures
c. forward
d. money market
e. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

27. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is \$.23. Furthermore, Money’s financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are \$.20 and \$.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____.
a. \$0.
b. −\$7,500.
c. \$7,500.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

28. Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the next quarter, Hanson has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is \$1.50. Furthermore, Hanson’s financial center has indicated that the possible values of the British pound at the end of next quarter are \$1.57 and \$1.59, with probabilities of .50 and .50, respectively. Based on this information, what is the expected real cost of hedging payables?
a. \$80,000.
b. −\$80,000.
c. \$1,570,000.
d. \$1,580,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

Exhibit 11-1

U.S. Jordan
360-day borrowing rate 6% 5%
360-day deposit rate 5% 4%

29. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?
a. \$377,115.
b. \$373,558.
c. \$363,019.
d. \$370,000.

30. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is \$1.48, while the 360-day forward rate is \$1.46. What is Pablo’s cost from implementing a money market hedge (assume Pablo does not have any excess cash)?
a. \$224,135.
b. \$226,269.
c. \$224,114.
d. \$223,212.

31. Lorre Company needs 200,000 Canadian dollars (C\$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:

Possible Value of
Canadian Dollar in 90 Days Probability
\$0.54 15%
0.57 25%
0.58 35%
0.59 25%

The 90-day forward rate of the Canadian dollar is \$.575, and the expected spot rate of the Canadian dollar in 90 days is \$.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?
a. 40%.
b. 60%.
c. 15%.
d. 85%.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

32. Quasik Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount received from the currency option hedge?
a. \$219,000.
b. \$222,000.
c. \$216,000.
d. \$213,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

33. FAB Corporation will need 200,000 Canadian dollars (C\$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is \$.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
a. \$144,000.
b. \$148,000.
c. \$152,000.
d. \$150,000.

SOLUTION: (\$.71 + \$.01)  200,000 = \$144,000. Note: the call option is not exercised since the spot rate is less than the exercise price.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

34. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A\$) 180 days from now. Put options are available for a premium of \$.02 per unit and an exercise price of \$.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:

Future Spot Rate Probability
\$.46 20%
\$.48 30%
\$.52 50%

The 90-day forward rate of the Australian dollar is \$.50.

What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a. 0%.
b. 80%.
c. 50%.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Application

35. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
a. put option
b. forward
c. call option
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

36. Which of the following is the least effective way of hedging exposure in the long run?
a. long-term forward contract.
b. currency swap.
c. parallel loan.
d. money market hedge.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

37. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.
b. lagging
c. cross-hedging
d. currency diversification
e. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

38. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries and it may not be necessary to hedge the position of each individual subsidiary.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

39. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a. receivable; purchase
b. payable; sell
c. payable; purchase
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

40. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.
a. forward; small
b. futures; large
c. forward; large
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

41. Celine Co. will need €500,000 in 90 days to pay for German imports. Today’s 90-day forward rate of the euro is \$1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be \$1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be \$1.09. Based on this information, the expected value of the real cost of hedging payables is \$____.
a. −35,000
b. 25,000
c. −1,000
d. 1,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

42. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
a. highly positive.
b. highly negative.
c. zero.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

43. If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency as a dollar amount for comparison purposes.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

44. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?
a. \$952,381.
b. \$995,851.
c. \$943,396.
d. \$995,025.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

45. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is \$1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
a. \$1,000,000.
b. \$1,055,602.
c. \$1,000,830.
d. \$1,045,644.

46. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

47. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

48. To hedge a contingent exposure, in which an MNC’s exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.
a. money market
b. futures
c. forward
d. options

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

49. A ____ is not normally used for hedging long-term transaction exposure.
a. long-term forward contact
b. futures contract
c. currency swap
d. parallel loan

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

50. The ____ does not represent an obligation.
a. long-term forward contract
b. currency swap
c. parallel loan
d. currency option

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

51. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

52. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

53. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

54. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

55. MNCs generally do not need to hedge because shareholders can hedge their own risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

56. Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

58. When the real cost of hedging is positive, this implies that hedging was more favorable than not hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

59. A futures hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

60. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

61. The price at which a currency put option allows the holder to sell a currency is called the settlement price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Comprehension

62. A put option essentially represents two swaps of currencies, one swap at the inception of the loan contract and another swap at a specified date in the future.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Comprehension

63. The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

64. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

65. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

66. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

67. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

68. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

69. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of \$.68 and a premium of \$.02 is available. Also, a 180-day put option with an exercise price of \$.66 and a premium of \$.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is \$.67, what is the amount received from the currency option hedge (after considering the premium paid)?
a. \$330,000
b. \$325,000
c. \$320,000
d. \$340,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

72. You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of \$.01 per unit and an exercise price of \$.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:

Future Spot Rate Probability
\$.01035 20%
\$.01032 20%
\$.01030 30%
\$.01029 30%

The 90-day forward rate of the Japanese yen is \$.01033.

What is the probability that the call option will be exercised (assuming Montana purchased it)?
a. 30%
b. 60%
c. 20%
d. 40%

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Application

73. If an MNC assesses net transaction exposure, this refers to the consolidation of all expected inflows for a particular time and currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Comprehension

74. Most MNCs do not perceive their foreign exchange management as a profit center. Rather, their main responsibility is to assess potential exposure and determine how and if the exposure should be hedged.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

75. If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

76. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Knowledge

77. To hedge a payable position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the U.S. until the payable is due.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

78. If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

79. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.01
KEY: Bloom’s: Knowledge

80. An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.02
KEY: Bloom’s: Comprehension

81. To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

82. Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

83. If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.03
KEY: Bloom’s: Knowledge

84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

85. Most MNCs can completely hedge all of their transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.04
KEY: Bloom’s: Knowledge

86. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Comprehension

87. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05
KEY: Bloom’s: Knowledge

88. Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.11.05