Deck 21: International Financial Management

Question 1

Currency exchange rates may be either floating or fixed.

Answer 1

True

Question 2

During the global financial crisis that began in late 2008, the dollar fell in value relative to the British pound and the euro.

Answer 2

False

Question 3

A foreign affiliate lowers the portfolio risk of its parent company because the foreign and domestic economies tend to be fairly similar.

Answer 3

False

Question 4

A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk.

Question 5

Companies such as Coca-Cola and IBM generate more than 50 percent of their sales and earnings from foreign activities.

Question 6

A bear market (declining stock prices) will tend to exert a depressing effect on the value of a country's currency.

Question 7

A forward exchange rate is used to help determine the value of a currency at a future point in time.

Question 8

Multinational firms tend to have a lower level of portfolio risk than comparable U.S. firms.

Question 9

When a country has a weak currency relative to other countries, visiting that country is much more expensive for residents of other countries.

Question 10

The Purchasing Power Parity Theory states that currency exchange rates tend to vary inversely with their respective purchasing powers in order to provide similar purchasing powers.

Question 11

A foreign exchange rate specifies how much a currency is worth in terms of another currency.

Question 12

Balance of payments is a method of keeping the foreign exchange market in equilibrium.

Question 13

In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank.

Question 14

A foreign affiliate may be an exporter, a joint venture or a fully owned foreign subsidiary.

Question 15

Investors and firms who diversify their U.S. portfolios by buying foreign stocks or investing in foreign subsidiaries take on a much higher level of portfolio risk than if they had invested in domestic stocks or companies.

Question 16

The North American Free Trade Association (NAFTA) continues to generate more foreign trade despite some negative political views.

Question 17

An exporter is able to satisfy foreign demand for a product while avoiding long-term investment although this method is riskier than other alternatives.

Question 18

The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.

Question 19

There is no guarantee that any currency will stay strong relative to other currencies, but the dollar is an exception.

Question 20

In recent years, fully owned foreign subsidiaries are experiencing increased political pressure from foreign governments.

Question 21

According to the interest rate parity theory, interest rates and exchange rates adjust until the foreign exchange market and the money market are in equilibrium.

Question 22

Transaction exposure results in foreign exchange gains and losses.

Question 23

The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.

Question 24

A money market hedge does not require the use of a futures exchange.

Question 25

The term balance of payments refers to the flow of economic transactions between the residents of one country and the residents of another.

Question 26

The most widely used currency in the Eurobond market is the euro.

Question 27

In Germany, restrictions limiting labor layoffs have encouraged companies to reduce investment there. Thus, in the long-run, these labor protection laws actually can be expected to result in higher unemployment in Germany.

Question 28

In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate.

Question 29

Translation exposure occurs because of changes in foreign exchange rates.

Question 30

Political risk and labor unrest will tend to strengthen a countries currency.

Question 31

Political risks include the possibility that a government may expropriate a firm's profits, or worse, repatriate all of the firm's assets.

Question 32

Expected future value of a currency is reflected in its spot rate.

Question 33

Foreign exchange risk is the risk that a person or business will not be able to exchange currencies.

Question 34

Forward contracts tend to be created on organized exchanges like the International Money Market of the Chicago Mercantile Exchange.

Question 35

The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time.

Question 36

A fronting loan disguises the identity of a parent multinational corporation that infuses money into a foreign subsidiary. This technique is intended to reduce the political risk of operating a subsidiary in a foreign country.

Question 37

In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from the parent company to the subsidiary.

Question 38

A firm which might suffer a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures.

Question 39

When a bank issues a letter of credit, the bank absorbs ALL of the credit risk to the exporter.

Question 40

Transaction Exposure associated with changes in the exchange rate between countries can be hedged with a currency futures contract.

Question 41

If a Czech crown is equal to $.05, the U.S. dollar is equal to how many Czech crowns?

A) 25.00
B) 4.00
C) 20.00
D) 400.00

Question 42

A form of MNC which exposes the firm to the least amount political risk, and is therefore the preferred arrangement by both business and foreign governments is called a (an)

A) exporter.
B) licensing agreement.
C) joint venture.
D) fully-owned foreign subsidiary.

Question 43

A multinational corporation may be defined as

A) a company which owns property in a foreign country.
B) a company which hires foreign laborers.
C) a company which carries on some business activity outside of its own national borders.
D) more than one of the above are correct.

Question 44

Multinational corporations may take several forms. An exporter could be described as

A) an MNC which produces a product within its own borders, but sells in a foreign market.
B) the least risky political arrangement.
C) an MNC willing to commit itself to a long-term foreign investment.
D) more than one of the above are true.

Question 45

A licensing agreement provides a U.S. MNC with a guarantee that they will be able to export product to the foreign market.

Question 46

Eurobond issues are sold simultaneously in several national capital markets, but denominated in a currency different from that of the nation in which the bonds are issued.

Question 47

The increase in supply of short-term investments in the U.S. by Chinese investors when rates are higher in the U.S. is an example of purchasing power parity.

Question 48

Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes risk for any multinational corporation.

Question 49

As Exchange rates change, they

A) change the relative purchasing power between countries.
B) can affect imports and exports between those two countries.
C) will affect the flow of funds between the countries.
D) all of these are true.

Question 50

Legal, political, and economic factors are most conducive to which form of multinational corporation (MNC) organization?

A) Exporter/importer
B) Licensing agreements
C) Joint ventures
D) Fully-owned foreign subsidiaries

Question 51

For a U.S. company, foreign business operations are more complex because the

A) host country's economy may be different from the domestic economy.
B) rules of taxation are different.
C) structure and operations of financial markets vary.
D) all of these are true.

Question 52

When the euro rises and the dollar falls, foreign travel to Europe will become cheaper for Americans.

Question 53

In a licensing agreement, the multinational corporation will very likely

A) be able to compete with the local domestic manufacturers.
B) experience import restrictions imposed by the foreign government.
C) allow a foreign firm to use its technology in exchange for a fee.
D) none of these are true.

Question 54

A fully owned foreign subsidiary is a form of MNC in which

A) a local entrepreneur buys the firm in that foreign country.
B) the MNC owns and operates the firm by itself.
C) the foreign government gives its full cooperation.
D) none of these are true.

Question 55

If prices double in New York while the prices in Frankfort remain the same, the purchasing power of the dollar relative to the mark

A) should increase by 50%.
B) should increase by 100%.
C) should decrease by 50%.
D) should decrease by 100%.

Question 56

Which of the following is NOT an accusation made against MNCs by foreign countries?

A) MNCs cause instability in their currencies in international money and foreign exchange markets.
B) MNCs contribute to unemployment and avoid taxes.
C) MNCs exploit local labor with low wages.
D) All of these are accusations made by critics of MNCs.

Question 57

A rising euro and falling dollar will increase U.S. exports to Europe.

Question 58

A particular country's pattern of importing more than is being exported is likely to

A) depress that country's currency.
B) depress other countries' currencies.
C) increase the value of that country's currency.
D) more than one of the above is true.

Question 59

As inflation in France increases and stays the same in the U.S., the exchange rate of the euro to the dollar will increase.

Question 60

Because of political risk, it is generally disadvantageous for U.S. firms to list their stocks on the world stock exchanges.

Question 61

Which of the following hedging strategies involves a loan without a futures contract?

A) Eurobond market
B) Forward exchange market
C) Money market
D) IMM contract

Question 62

Which of the following statements about forward exchange rates is false?

A) They reduce uncertainty about future value of currencies.
B) They reflect expectations about the future value of currencies.
C) They are usually slightly lower than the spot rate.
D) All of these are true.

Question 63

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

A) Purchasing Power Parity Theory.
B) Balance of Payments.
C) Interest Rate Parity Theory.
D) None of these.

Question 64

A firm exposed to exchange rate risk can hedge its risk by

A) using the forward exchange market.
B) borrowing in international money markets.
C) utilizing foreign currency futures markets.
D) all of these.

Question 65

Which of the following factors will not increase the value of a currency in foreign markets?

A) High interest rates
B) High inflation
C) Positive balance of payments
D) Strong stock market rally

Question 66

Three years ago, the U.S. dollar's exchange rate with the Iceland krona was .0008 dollars per krona. Today, the exchange rate was .0006 dollars per krona. These figures indicate that over this three-year period, the dollar

A) strengthened against the krona.
B) weakened against the krona.
C) is not highly correlated to the krona.
D) the answer cannot be determined without knowing the number of kronas needed to buy a dollar.

Question 67

Which of the following hedging strategies is not used to minimize transaction exposure?

A) Eurobond market.
B) Forward exchange market.
C) Money market.
D) Currency futures market.

Question 68

Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?

A) Hedging in the forward exchange market.
B) Hedging in the money market.
C) Hedging in the stock market.
D) Hedging in the currency futures market.

Question 69

The spot rate of the British pound to the dollar is 1.15 ( $\le\le$ ). The 180 day forward rate is $1.17, the annualized forward premium is:

A) 1.018%
B) 3.571%
C) 7.273%
D) 3.478%

Question 70

You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to the dollar. When you arrive, you convert $1,000 into how many pesos?

A) 1,300
B) 80
C) 13,000
D) Not enough information to tell

Question 71

Assume that you had dollar quotes for the Japanese Yen and the British Pound. If you want to know the Yen/Pound exchange rate, you would rely on

A) forward rates.
B) cross rates.
C) the Wall Street Journal.
D) hedge ratios.

Question 72

The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119. The cross rate between the franc and the pound is:

A) .161
B) 1.61
C) .0322
D) 3.22

Question 73

When Country A's currency strengthens against Country B's, citizens of Country A will

A) pay less to buy Country B's products.
B) pay more to buy Country B's products.
C) pay more to buy domestically produced products.
D) not be affected by the change in their currency's value.

Question 74

The value of a country's currency may increase by

A) continuous excessive government spending.
B) a stock market rally in that country.
C) an increase in that country's money supply.
D) more than one of the above.

Question 75

The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC). What was the discount or premium on 3-month forward for LC?

A) 0.643% premium
B) .013% premium
C) .013% discount
D) 0.643% discount

Question 76

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

A) foreign exchange risk.
B) political risk.
C) translation exposure.
D) hedging risk.

Question 77

Which of the following kinds of risk is NOT uniquely associated with MNC's?

A) Exchange rate risk
B) Business risk
C) Political risk
D) None of these are uniquely associated with MNCs

Question 78

The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the

A) purchasing power theory of exchange rates.
B) interest rate parity theory of exchange rates.
C) balance of payments theory of exchange rates.
D) government intervention theory of exchange rates.

Question 79

While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

A) 13.75 pesos/dollar or 7.3 cents/peso.
B) 80 pesos/dollar or 1.25 cents/peso.
C) 7.3 pesos/dollar or 13.75 cents/peso.
D) not enough information to tell.

Question 80

You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos to the dollar. How many dollars will you receive?

A) $3025.00
B) $24.16
C) $264.00
D) Not enough information to tell.