Deck 27: Multinational Financial Management

Question 1

The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.

Answer 1

False

Question 2

A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

Answer 2

True

Question 3

Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros?

A) 0.43
B) 0.86
C) 1.41
D) 1.64
E) 2.27

Answer 3

B
SF/euro = (1.41/1) × (1/1.64) = 1.41/1.64 = 0.86 SF/euro.

Question 4

Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Question 5

If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian dollar?

A) 0.37
B) 0.61
C) 1.00
D) 1.64
E) 3.28

Question 6

Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?

A) 1 british pound equals 3.2400 swiss francs
B) 1 british pound equals 2.6244 swiss francs
C) 1 british pound equals 1.8588 swiss francs
D) 1 british pound equals 1.0000 swiss francs
E) 1 british pound equals 0.3810 swiss francs

Question 7

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Question 8

If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will

A) depreciate against the u.s. dollar.
B) remain unchanged against the u.s. dollar.
C) appreciate against other major currencies.
D) appreciate against the dollar and other major currencies.
E) appreciate against the u.s. dollar.

Question 9

Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

A) 1.12
B) 1.63
C) 1.82
D) 2.04
E) 3.64

Question 10

Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

A) 155.5 yen
B) 144.0 yen
C) 133.5 yen
D) 78.0 yen
E) 72.0 yen

Question 11

Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

Question 12

If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S. dollar.

Question 13

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.

A) premium of 8%
B) premium of 18%
C) discount of 18%
D) discount of 8%
E) premium of 16%

Question 14

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Question 15

Multinational financial management requires that financial analysts consider the effects of changing currency values.

Question 16

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

Question 17

Exchange rate quotations consist solely of direct quotations.

Question 18

If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?

A) 0.50
B) 0.71
C) 1.00
D) 1.41
E) 2.81

Question 19

When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Question 20

In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars?

A) $5.964
B) $8,200
C) $10,250
D) $12,628
E) $13,525

Question 21

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Question 22

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Question 23

Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.

Question 24

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Question 25

Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?

A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million

Question 26

Which of the following is NOT a reason why companies move into international operations?

A) to develop new markets for the firm's products.
B) to better serve their primary customers.
C) because important raw materials are located abroad.
D) to increase their inventory levels.
E) to take advantage of lower production costs in regions where labor costs are relatively low.

Question 27

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S. corporations.

Question 28

Which of the following statements is NOT CORRECT?

A) foreign bonds and eurobonds are two important types of international bonds.
B) foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) the term eurobond applies only to foreign bonds denominated in u.s. currency.
D) a foreign bond might pay a higher nominal interest rate than a u.s. bond.
E) any bond sold outside the country of the borrower is called an international bond.

Question 29

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

Question 30

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Question 31

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

A) 9.00%
B) 10.20%
C) 11.28%
D) 12.50%
E) 13.57%

Question 32

Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?

A) ?$240,000
B) ?$43,200
C) $0
D) $43,200
E) $47,473

Question 33

Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

A) $0
B) $1,834.86
C) $4,517.26
D) $5,712.31
E) $7,547.17

Question 34

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

Question 35

The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Question 36

When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

Question 37

Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?

A) $1,075,958
B) $1,025,000
C) $1,000,000
D) $975,610
E) $929,404

Question 38

A U.S.-based company, Stewart, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Stewart end up paying on the loan?

A) 10.36%
B) 11.50%
C) 17.44%
D) 20.00%
E) 21.79%

Question 39

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S. money market instruments.

Question 40

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

Question 41

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?

A) ?7.92%
B) ?4.13%
C) 6.00%
D) 8.25%
E) 12.00%

Question 42

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

A) 1 pound = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031

Question 43

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?

A) the yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
B) the yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
C) the spot rate equals the 90-day forward rate.
D) the spot rate equals the 180-day forward rate.
E) the yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.

Question 44

A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

A) ?$396
B) ?$243
C) $0
D) $243
E) $638

Question 45

Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?

A) 1 u.s. dollar = 0.6235 canadian dollars
B) 1 u.s. dollar = 0.6265 canadian dollars
C) 1 u.s. dollar = 1.0000 canadian dollars
D) 1 u.s. dollar = 1.5961 canadian dollars
E) 1 u.s. dollar = 1.6039 canadian dollars

Question 46

A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?

A) 1 u.s. dollar equals 0.69 swiss francs
B) 1 u.s. dollar equals 0.85 swiss francs
C) 1 u.s. dollar equals 1.21 swiss francs
D) 1 u.s. dollar equals 1.29 swiss francs
E) 1 u.s. dollar equals 1.44 swiss francs

Question 47

A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

A) 123.75 swiss francs
B) 454.55 swiss francs
C) 750.00 swiss francs
D) 1,237.50 swiss francs
E) 1,650.00 swiss francs

Question 48

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?

A) $14.79
B) $63.00
C) $74.55
D) $85.88
E) $147.88

Question 49

A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.