Deck 18: International Financial Management

Question 1

As we go from home operations to international operations, we can potentially receive a ________ , but we can also see our ________ increase.

A) diversification benefit; systematic risk
B) diversification disadvantage; total risk
C) diversification disadvantage; systematic risk
D) diversification benefit; total risk

Answer 1

D

Question 2

Which of the statements below is FALSE?

A) Political risk involves changes in a foreign government. At one extreme is the case in which a local government "takes over" the assets of the company and nationalizes it.
B) Political risk involves changes in a foreign government. At one extreme is the case in which a government encourages foreign investment and gives breaks to companies willing to move operations locally.
C) There are three basic defensive mechanisms that can guard against the extreme case of nationalized assets. These include keeping critical operations private, financing operations and assets with local money, and receiving primary inputs outside the local economy.
D) One way that a multinational firm can minimize the potential of nationalization of assets by a foreign government is to share key elements of operations with the government.

Answer 2

D

Question 3

Specific issues related to cultural differences can arise in the management of a multinational enterprise. All of the following are related to cultural differences EXCEPT:

A) a requirement to have local management.
B) issues with promotion of women into management positions.
C) issues with observation of religious holidays.
D) nationalization of the assets of a company by the foreign government.

Answer 3

D

Question 4

A major aspect of operating a business in a host country is the business risk that must be assumed. Which of the following is NOT a business risk?

A) A severe drought
B) Necessary extra training for unskilled local workers
C) A rise in internet rates
D) A shift in exchange rates

Question 5

One way to minimize the threat of nationalization in a host country is to maintain key elements of operations safely within the firm.

Question 6

There are three basic defensive mechanisms that can guard against the extreme case of nationalized assets. Which of the mechanisms below is NOT one of these?

A) Keeping critical operations private
B) Making critical operations public
C) Financing operations with local money
D) Financing assets with local money

Question 7

In regard to the cultural risks related to nepotism and corrupt practices, which of the statements below is TRUE?

A) The Foreign Corrupt Practices Act, passed during the administration of President Carter, makes it illegal for U. S. citizens to pay bribes to foreign officials or leaders in order to facilitate business operations.
B) If a firm does not have a competitive advantage so that it can overcome the bribery situation and still make a profit, it may be best to look somewhere else to extend business operations.
C) Companies can be forced by a local government official to hire specific individuals and place them in positions of control.
D) All of these statements are true.

Question 8

Describe business risk and political risk.

Question 9

In regard to the cultural risks related to human resources management, which of the statements below is TRUE?

A) In some countries, women are restricted from management positions.
B) The hiring of local citizens instead of bringing in foreign expatriates is often a necessary part of doing business abroad.
C) Foreign expatriates would find it difficult living and working in a community where they are seen as taking away wages and livelihood from local citizens.
D) All of these statements are true.

Question 10

In regard to the cultural risks related to intellectual property rights, which of the statements below is FALSE?

A) Property rights, in general, refer to the right of an individual to use his or her talents and properties (assets) for company gain.
B) Intellectual property rights refer to the product or service that is created by the talents of an individual.
C) The exclusive use of a specific technological advantage may be lost because local governments do not respect or honor copyright or patent laws.
D) Intellectual property rights are established through patents and copyrights in order to protect the goods and services of the original developer and the revenues pertaining to them.

Question 11

A defense against nationalization is to have the assets financed by the overseas company.

Question 12

The difficulties of managing international business operations stem from three special issues. Which of the choices below is NOT one of these?

A) Political risk
B) Differences in business practices
C) Social fads
D) Cultural differences

Question 13

________ involves the changes in a foreign government that can have far-reaching effects on a multinational company.

A) Social risk
B) Political risk
C) Business risk
D) Government risk

Question 14

________ arise(s) from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in a host country.

A) Cultural risk
B) Political risk
C) Social fads
D) Similarities in business beliefs

Question 15

In regard to the cultural risks related to ownership structure, which of the statements below is FALSE?

A) Cultural norms work their way into laws and regulations so that the interests of the host country will take precedence over the interest of the foreign country, the original home of the business.
B) In order to start a business operation in a foreign country, it may be necessary to utilize a joint venture business form.
C) Today, there are practically no industries protected against foreign ownership in host countries.
D) The ownership structure of a business can be restricted once the business ventures overseas and faces the additional constraint of meeting ownership requirements of more than one government.

Question 16

Cultural risk arises from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in a host country. Name and describe two of the five specific issues as identified in the textbook relating to cultural differences.

Question 17

Although domestic firms face political risk, we tend to think the stakes are much higher with foreign operations.

Question 18

The ________ refers to the price of one country's currency in units of another country's currency.

A) exchange price
B) forward rate
C) exchange rate
D) currency rate

Question 19

Nepotism can be a problem for an American company in a foreign host country, but fortunately, it is not a problem in the United States.

Question 20

Businesses that operate in more than one country are commonly referred to as ________.

A) multiamerican firms
B) multinational firms
C) ultranational firms
D) worldwide firms

Question 21

In the United States, we can buy a pair of shoes for $58. These shoes are identical in every way, shape, and form to a pair of shoes from Japan that be purchased for ¥7,200 including shipping costs. From whom should we order the shoes if we can exchange $1 for ¥120?

A) Buy from the U.S., as we save $2.00.
B) Buy from Japan, as we save $2.00.
C) Buy from the U.S., as we save $4.00.
D) Buy from Japan, as we save $4.00.

Question 22

The beginning-of-the-year prices for a pair of boots are $50 in the United States and ¥8,000 in Japan. We know that prices in the United States and Japan will change over the coming year due to inflation. If we assume that inflation in the United States (our home country, inf_h) will be 5% and inflation in Japan will be 6% (our foreign country, inf_fo), what will the price of the boots be at the end of the year?

A) The U.S. boot price is $52.50 and the Japanese boot price is ¥8,480.
B) The U.S. boot price is $52.50 and the Japanese boot price is ¥8,240.20.
C) The U.S. boot price is $52 and the Japanese boot price is ¥8,240.50.
D) The U.S. boot price is $52 and the Japanese boot price is ¥8,480.

Question 23

The relationship between the American or direct rate and the European or indirect rate is simply ________.

A) a reversal
B) an inversal
C) a reciprocal
D) All of these

Question 24

Assume that you are the manager of a U.S. company and you face an exchange rate of ¥120 per $1. Whenever you receive an order, rather than ship from your production facilities, you call in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to you is ¥7,500 and you can collect $65 per item sold to your customer, what would be your profit per item be if you pay the Japanese company ¥7,500?

A) $1.50 per item
B) $1.60 per item
C) $2.50 per item
D) $2.80 per item

Question 25

The ________ reflects the rate or amount of U.S. dollars required to purchase one unit of a foreign currency.

A) direct rate
B) European rate
C) indirect rate
D) equivalent rate

Question 26

Which of the statements below is FALSE?

A) The opportunity to make a profit without risk by exchanging three currencies is known as triple arbitrage.
B) When cross rates are out of line, there can be an arbitrage opportunity.
C) Exchange rates vary from one day to the next.
D) Even if you could not do a direct exchange between pounds and yen, you could convert pounds to dollars and then dollars to yen and ultimately end up changing pounds into yen.

Question 27

If £1 buys ¥200, then the reciprocal states that ¥1 buys what?

A) £0.00491
B) £0.00494
C) £0.00500
D) £0.00512

Question 28

Rather than a single good for the exchange rate, economists use the concept of ________ as the price base for the exchange rate.

A) a pair of shoes
B) the price of a barrel of oil
C) a basket of goods
D) the S&P 500 Index

Question 29

Assume that you are the manager of a U.S. company and you face an exchange rate of ¥120 per $1. Whenever you receive an order, rather than ship from your production facilities, you call in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to you is ¥7,500 and you can collect $62 per item sold to your customer, what would be your loss per item if you pay the Japanese company ¥7,500?

A) -$0.50 per item
B) -$0.60 per item
C) -$0.75 per item
D) -$0.80 per item

Question 30

________ is a financial term for "free money," that is, the opportunity to make a profit without risk.

A) Free rider
B) Arbitrage
C) Trading in perfect markets
D) Trading in imperfect markets

Question 31

Which of the statements below is TRUE?

A) The foreign rate is derived by pricing two currencies against a third.
B) All domestic rates can be computed using a setup with American rates and European rates with the U.S. dollar as the home currency.
C) The opportunity to make a profit without risk by exchanging three currencies is known as triple arbitrage.
D) When cross rates are out of line, there can be an arbitrage opportunity.

Question 32

In the United States, we can buy a pair of shoes for $55. These shoes are identical in all aspects to a pair of shoes from Japan that be purchased for ¥6,000 including shipping costs. What percentage (relative to $55 U.S. cost) can we save by buying the shoes in Japan if the exchange rate is $1 for ¥120?

A) 9.13%
B) 9.11%
C) 9.09%
D) 9.07%

Question 33

In the United States, we can buy a pair of shoes for $36. These shoes are identical in all aspects to a pair of shoes from Japan that be purchased for ¥6,000 including shipping costs. What dollar amount can we save by buying the shoes in the United States if the exchange rate is $1 for ¥150?

A) $5.00
B) $4.00
C) $3.00
D) $2.00

Question 34

________ means that the price of similar goods is the same, regardless of which currency one uses to buy the goods.

A) Interest rate parity
B) Purchasing power parity
C) Currency parity
D) Expectation parity

Question 35

The ________ is the amount of foreign currency you need to buy one U.S. dollar.

A) American rate
B) non-European rate
C) direct rate
D) indirect rate

Question 36

In terms of exchange rates, you can think of the denominator as what you want to buy and the numerator as ________.

A) the price in the foreign currency
B) the price in your currency
C) what you want to receive
D) None of these

Question 37

The beginning-of-the-year prices for a pair of boots are $50 in the United States and ¥8,000 in Japan. We know that prices in the United States and Japan will change over the coming year due to inflation. If we assume that inflation in the United States (our home country, inf_h) will be 4% and inflation in Japan will be 3% (our foreign country, inf_f), what will the price of the boots be at the end of the year?

A) The U.S. boot price is $52 and we do not know the Japanese boot price.
B) The U.S. boot price is $52 and the Japanese boot price is ¥8,240.
C) The Japanese boot price is ¥8,240 and we do not know the U.S. boot price.
D) We cannot determine either boot price.

Question 38

If £1 buys $1.30, then the reciprocal states that $1 buys what?

A) £0.7480
B) £0.7592
C) £0.7692
D) £0.7700

Question 39

If £1 buys $1.20, then the reciprocal states that $1 buys what?

A) £0.8333
B) £0.8833
C) £0.3833
D) £0.3888

Question 40

Assume that you are the manager of a U.S. company and you face an exchange rate of ¥150 per $1. Whenever you receive an order, rather than ship from your production facilities, you call in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to you is ¥7,500 and you can collect $55 per item sold to your customer, what would be your profit if you pay the Japanese company ¥7,500?

A) $5.00 per item
B) $4.75 per item
C) $4.50 per item
D) $4.00 per item

Question 41

The beginning-of-the-year prices for sunglasses are $30 in the United States and ¥5,000 in Japan. We know that prices in the United States and Japan will change over the coming year due to inflation. If we assume that inflation in the United States (our home country, inf_h) will be 3% and inflation in Japan will be 2% (our foreign country, inf_f), what will the price of the sunglasses be at the end of the year? If one U.S. dollar can be exchanged for ¥166.6667 Japanese yen today and purchasing power parity holds, what can we say about the future exchange rate one year from now?

Question 42

To determine the exchange rate between British pounds and Brazilian reals, you can convert pounds into U.S. dollars at the direct rate and then convert dollars into reals at the indirect rate. You now have a cross rate (pounds to reals) via the U.S. dollar.

Question 43

Purchasing power parity means that the price of similar goods is the same regardless of which currency one uses to buy the goods.

Question 44

Lets return to the Big Mac Index and the concept of Purchasing Power Parity. If the price of a Big Mac burger in the United States is $4.25 and the current €/$ exchange rate is €0.7506/$, what is the implied price of a Big Mac in France?

A) $3.19
B) €3.19
C) €5.66
D) €4.25

Question 45

The euro was introduced as a physical currency in January 2002 at an exchange rate of $1.16/€. Today, relative to that beginning value, the euro has depreciated against the United States dollar.

Question 46

Which of the statements below is FALSE?

A) Forward rates play an important part in currency exchange because you can lock in future currency exchanges with these forward rates.
B) From a business perspective, forward contracts are hedging tools for companies. By locking in a future exchange rate, companies can avoid unfavorable movements in exchange rates.
C) When you convert your currency today, you are exchanging currency in the spot market.
D) The International Fisher effect tells us that inflation rates are the same the world over.

Question 47

When cross-rates are in line, we have what is known as a triangular arbitrage opportunity.

Question 48

We can write any anticipated forward exchange rate as a function of the difference between the expected inflation rates of two countries and the current or spot exchange rate.

Question 49

The beginning-of-the-year prices for a pair of boots are $50 in the United States and ¥8,000 in Japan. We know that prices in the United States and Japan will change over the coming year due to inflation. If we assume that inflation in the United States (our home country, inf_h) will be 3% and inflation in Japan will be 2% (our foreign country, inf_f), what will the price of the boots be at the end of the year? If one U. S. dollar can be exchanged for 160 Japanese yen today and purchasing power parity holds, what can we say about the future exchange rate one year from now?

Question 50

We can write any ________ as a function of the difference between the expected inflation rates of two countries and the current or spot exchange rate.

A) anticipated forward exchange rate
B) known forward exchange rate
C) anticipated spot rate
D) unanticipated forward exchange rate

Question 51

Lets return to the Big Mac Index and the concept of Purchasing Power Parity. If the current price of a Big Mac hamburger in the United States is $3.80, and the current price of the same burger in Germany is €2.75, what is the implied exchange rate of dollars per euro?

A) $0.7237/€
B) $1.3818/€
C) $1.4421/€
D) $1.5133/€

Question 52

Which of the statements below is TRUE?

A) Spot rates are based upon the interest rates for two countries.

C) There is no way to lock in future currency exchange rates.
D) What the International Fisher Effect really tells us is that inflation rates the world round are the same and that one cannot exploit different inflation rates across different countries.

Question 53

The current indirect rate is 100, the interest rate in the foreign country is 7%, the interest rate in the home country is 5%. What is the forward indirect rate if t = 3?

A) 0.94
B) 105.82
C) 110.00
D) 112.63

Question 54

The Euro-to-Canadian rate is the reciprocal of the Canadian-to-Euro rate.

Question 55

The forward indirect rate = current indirect rate × .

Question 56

When cross-rates are out of line, one path can lead you to riches and another to ruin.

Question 57

The current indirect rate is 120, the interest rate in the foreign country is 8%, and the interest rate in the home country is 5%. What is the forward indirect rate if t = 1?

A) 122.65
B) 123.43
C) 124.78
D) 125.55

Question 58

Which of the statements below is TRUE?

A) When illustrating triangular arbitrage, you start from the bottom of the triangle with an initial amount of money and, moving in a clockwise manner, you can see the three currency exchanges and the resulting currency amounts at each corner of the triangle.
B) When illustrating triangular arbitrage, you start from the top of the triangle with an initial amount of money and, moving in a clockwise manner, you can see the three currency exchanges and the resulting currency amounts at each corner of the triangle.
C) When illustrating triangular arbitrage, you start from the bottom of the triangle with an initial amount of money and, moving in a counter-clockwise manner, you can see the three currency exchanges and the resulting currency amounts at each corner of the triangle.
D) When illustrating triangular arbitrage, you start from the top of the triangle with an initial amount of money and, moving in a counter-clockwise manner, you can see the three currency exchanges and the resulting currency amounts in the middle of the triangle.

Question 59

The current indirect rate is 110, the interest rate in the foreign country is 7%, the interest rate in the home country is 5%. What is the forward indirect rate if t = 2?

A) 122.65
B) 114.23
C) 124.78
D) 125.55

Question 60

George Smith has saved up $10,000 for investing purposes. He sees that the CD rate in Japan is 5% for the coming year and only 4% in the United States. He also sees that the current indirect exchange rate is 120 yen per dollar. Looking at the forward rates, George sees that the one-year forward indirect rate is 125. Can he exploit this situation to his gain? Explain.

Question 61

Describe transaction, operating, and translation exposure.

Question 62

Suppose the future anticipated cash flows of a foreign business produce less domestic currency upon conversion. This problem in the reduction in the value of future cash flow from operations is called ________.

A) cash flow exposure
B) transaction exposure
C) asset exposure
D) operating exposure

Question 63

________ deals with possible negative effects of converting financial statements from foreign operations into domestic currency for consolidated reporting in the home country.

A) Conversion exposure
B) Transaction exposure
C) Operating exposure
D) Translation exposure

Question 64

Assume you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world. You have just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 375 krona per tricycle. You have already sold 3,000 tricycles and are now awaiting payment. The exchange rate today is 7.5 krona per dollar. Over the next ninety days, the indirect exchange rate unexpectedly moves from 7.5 to 7.7. What is the fall in domestic revenue due to this unexpected move in the exchange rate?

A) $389
B) $1289
C) $2896
D) $3896

Question 65

Which of the statements below is FALSE?

A) One way to hedge the future conversion of known sales is to enter into a forward contract at the time of the sale and lock in an exchange rate for the foreign currency to U.S. dollars.
B) The forward rate is the current spot rate divided by the different anticipated inflation rates between two countries.
C) Operating exposure reflects the impact on the long-run viability of a foreign business when unexpected change rates move against the domestic company.
D) The forward rate is the current spot rate times the different anticipated inflation rates between two countries.

Question 66

Which of the statement below is FALSE?

A) With an unexpected increase in exchange rates, the future cash flow of overseas operations can be less than anticipated, and thus the value of the business falls.
B) A company has one more added risk exposure when dealing with foreign operations even if forward rates can be used to hedge a falling profit margin caused by unfavorable changes in exchange rates,
C) Not all products and costs inflate at the same rate as the overall inflation rate of a country.
D) Translation principles in many countries require the use of current exchange rates for certain equity, fixed asset, and inventory accounts, but historical exchange rates for current assets, current liabilities, and income accounts.

Question 67

Translation principles in many countries require the use of historical exchange rates for current assets, current liabilities, and income accounts.

Question 68

Assume that you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world. You just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 1,000 krona per tricycle. You have already sold 3,000 tricycles and are now awaiting payment. The exchange rate today is 7.5 krona per dollar. Over the next ninety days the indirect exchange rate unexpectedly moves from 7.5 to 7.7. What will be your sales receipt in krona, and what amount of dollars will these kronas convert to at the indirect exchange rate?

A) 3,000,000 kronas and about 400,000 dollars
B) 3,000,000 kronas and about 389,610 dollars
C) 3,176,529 kronas and about 389,610 dollars
D) 3,000,000 kronas and about 300,000 dollars

Question 69

Gladys Smith has saved up $2,000 for investing purposes. She sees that the CD rate in Japan is 6% for the coming year and only 4% in the United States. She also sees that the current indirect exchange rate is 110 yen per dollar. Looking at the forward rates, Gladys sees that the one-year forward indirect rate is 115 yen per dollar. Can she exploit this situation to her gain? Explain.

Question 70

Assume you manage a firm that faces transaction exposure. Your company manufactures and sells automobile parts around the world. You have just completed a large sale of parts to an auto manufacturer in France and received a promised payment of €172 per part. You have already sold 17,000 parts and are now awaiting payment. The exchange rate today is $1.25/€. Over the next ninety days, the direct exchange rate unexpectedly moves from $1.25/€ to $1.30/€. What is the gain in domestic revenue due to this unexpected move in the exchange rate?

A) $106,000
B) $114,900
C) $118,500
D) $146,200

Question 71

One way to hedge the future conversion of known sales is to enter into a forward currency contract at the time of the sale and lock in the anticipated conversion rate of the foreign currency to the home currency.

Question 72

Anticipated cash inflows may fall in value if unexpected movements in the exchange rate hurt your ability to convert the foreign currency into domestic currency. This reduction in the conversion of future payments is called ________.

A) translation exposure
B) transaction exposure
C) conversion exposure
D) operating exposure

Question 73

Assume the cross-rate is off. Explain what you can do to exploit this situation.

Question 74

Translation principles in many countries require the use of historical exchange rates for certain equity, fixed asset, and inventory accounts.

Question 75

Assume that you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world. You just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 1,000 krona per tricycle. You have already sold 4,000 tricycles and are now awaiting payment. The exchange rate today is 7.3 krona per dollar. Over the next ninety days, the indirect exchange rate unexpectedly moves from 7.3 to 7.6. What is the fall in domestic revenue due to this unexpected move in the exchange rate?

Question 76

Assume that you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world. You just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 1,000 krona per tricycle. You have already sold 3,000 tricycles and are now awaiting payment. The exchange rate today is 7 krona per dollar. What will be your sales receipt in krona, and what amount of dollars will these kronas convert to at today's exchange rate?

A) 2,000,000 kronas and about 428,571 dollars
B) 3,000,000 kronas and about 300,000 dollars
C) 3,000,000 kronas and about 428,571 dollars
D) 2,000,000 kronas and about 300,000 dollars

Question 77

Transaction exposure deals with converting financial statements from foreign operations into consolidated reports of both foreign and domestic operations.

Question 78

________ involves issues of translating foreign financial statements into consolidated reports of financial performance of both foreign and domestic operations.

A) Translation exposure or accounting exposure
B) Business exposure or accounting exposure
C) Translation exposure or business exposure
D) Transaction exposure or financial exposure

Question 79

When accounts receivable involves a foreign operation, you face the added problem of changing ________.

A) exchange rates
B) forward rates
C) interest rates
D) cash flows

Question 80

Operating exposure reflects the impact on the short-run viability of a foreign business when unexpected exchange rates move against the domestic company.