Deck 21: International Financial Management

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Currency exchange rates may be either floating or fixed.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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 11

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 12

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

Question 13

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

Question 14

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

Question 15

A forward exchange rate can be used to help establish the value of a currency at a future point in time.

Question 16

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

Question 17

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

Question 18

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 19

To add financial strength and stability, the countries of Greece and Portugal are now considering joining the "Eurozone."

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

A firm that perhaps suffers 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 26

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

Question 27

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

Question 28

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

Question 29

Translation exposure occurs because of changes in foreign exchange rates.

Question 30

Transaction exposure results in foreign exchange gains and losses.

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

Political risk and labor unrest will tend to strengthen a country's currency.

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

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

A rising euro and a falling dollar will cause an increase in U.S. exports to Europe.

Question 44

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 options are accusations made by critics of MNCs.

Question 45

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

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

Question 46

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

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

Question 47

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 48

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

Question 49

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

Question 50

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

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

Question 51

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

Question 52

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

Question 53

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 options are true.

Question 54

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 55

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 56

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 options.

Question 57

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 options are true.

Question 58

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

Question 59

A multinational corporation may be defined as

A)a company that owns property in a foreign country.
B)a company that hires foreign laborers.
C)a company that carries on some business activity outside of its own national borders.
D)More than one of the options.

Question 60

The possibility of political risk may be excluded when an investor considers maximizing expected returns.

Question 61

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

A)$3025.00
B)$24.16
C)$264.00
D)Not enough information is given to determine an answer.

Question 62

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 is given to determine an answer.

Question 63

The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC). $$\begin{array} { l l } \text { Spot } & \$ 0.03112 / \mathrm { LC } \\3 \text {-month forvard } & \$ 0.03117 / \mathrm { LC } \\6 \text {-month forward } & \$ 0.03118 / \mathrm { LC }\end{array}$$ What was the approximate discount or premium on a three-month forward for LC?

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

Question 64

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 65

Which of the following kinds of risk is NOT uniquely associated with MNCs?

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

Question 66

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 67

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

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

Question 68

Three years ago, the U.S. dollar's exchange rate with the Iceland krona was .0008 dollars per krona. Today, the exchange rate is .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 69

The spot rate of the British pound to the dollar is 1.15 (£≤). The 180-day forward rate is $1.17. Thus, the approximate annualized forward premium is _________.

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

Question 70

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

A)High interest rates in that country
B)High inflation in that country
C)A positive balance of payments with that country
D)A strong stock market rally in that country

Question 71

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

A)The Eurobond market
B)The forward exchange market
C)The money market
D)The currency futures market

Question 72

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 options

Question 73

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) forms 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 74

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 is given to determine an answer.

Question 75

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

A)They reduce uncertainty about the 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 options are true.

Question 76

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 (the number of Swiss francs that would buy one British pound) is approximately:

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

Question 77

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 78

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 options are true.

Question 79

Assume that you had U.S. 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 80

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 options