Question 1

The current rate method is the method by which the is used to translate the foreign subsidiary's financial statements into Canadian dollars.

Accepted Answer

The current rate method is indeed used to translate the foreign subsidiary's financial statements into Canadian dollars.

Question 2

The interest rates offered in the Euromarket on the Canadian dollar are greatly affected by the prime rate inside Canada.

Accepted Answer

The prime rate inside Canada is a key factor in determining the interest rates offered in the Euromarket on the Canadian dollar. If the prime rate in Canada is high, then the interest rates offered in the Euromarket on the Canadian dollar are likely to be high as well, and vice versa.

Question 3

In the international context, the effective interest rate is equal to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.

Accepted Answer

This statement is true. The effective interest rate takes into account both the nominal interest rate as well as any expected changes in exchange rates between the currency of the parent company and a foreign currency. This can impact the overall return or cost of borrowing for the multinational corporation.

Question 4

The spot exchange rate is the rate of exchange between two currencies at some specified futuredate.

Accepted Answer

The spot exchange rate is the rate of exchange between two currencies at the current moment, not at a future date. The rate at a future date would be a forward exchange rate.

Question 5

Functional currency is the currency of the economic environment in which a business entity primarily generates and expends cash, and in which its accounts are maintained.

Accepted Answer

Functional currency is defined as the currency that is used by a business entity primarily in its operations and in which its financial statements are prepared. This currency is usually the currency of the country in which the entity operates, although there may be situations where another currency is used as the functional currency.

Question 6

A multi-national corporation (MNC) can give some protection to international cash flows by reducing its liabilities if the currency is appreciating, or by reducing its financial assets if the currency is depreciating.

Accepted Answer

By reducing its liabilities in an appreciating currency, the MNC would have a lower cost of repayment. Similarly, by reducing its financial assets in a depreciating currency, the MNC would have a lower loss in value. This can provide some protection to international cash flows.

Question 7

In the case of short-term financing, the forces of supply and demand are among the main factors determining exchange rates in Eurocurrency markets.

Accepted Answer

Short-term financing has a direct impact on exchange rates in Eurocurrency markets, and the forces of supply and demand play a significant role in determining these rates. The availability and demand for funds in a particular currency directly affects its exchange rate with other currencies.

Question 8

The foreign direct investment (FDI) is a multinational corporation's transfer of capital, managerial, and technical assets from a host country to its home country.

Accepted Answer

The statement is incorrect. FDI refers to a multinational corporation's transfer of capital, managerial, and technical assets from a home country to a host country, not the other way around.

Question 9

If a $1 Canadian costs $0.80 U.S., then $1 U.S. must cost $1.25 Canadian.

Accepted Answer

Since the exchange rate is $0.80 U.S. per $1 Canadian, we can flip the ratio to get $1 Canadian per $0.80 U.S. To find out how much $1 U.S. would be in Canadian dollars, we can multiply by the reciprocal of $0.80, which is 1.25. Therefore, $1 U.S. must cost $1.25 Canadian.

Question 10

Because of their access to the international bond and equity markets, MNCs may have lower costs of various sources of long-term financing, thus resulting in differences between the capital structures of these firms and those of purely domestic companies.

Accepted Answer

This statement is true as MNCs have access to international financing options which may have lower costs compared to domestic financing options. This results in differences in their capital structure compared to purely domestic companies.

Question 11

The forward exchange rate is the rate of exchange between two currencies on any given day.

Accepted Answer

The forward exchange rate refers to the exchange rate agreed upon today for a currency transaction that will take place at a future date, not the current day's exchange rate.

Question 12

Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the firm's value.

Accepted Answer

Economic exposure refers to the extent to which a firm's value is affected by changes in exchange rates. This type of exposure is different from transaction and translation exposure, which relate to specific financial transactions and accounting entries, respectively. Economic exposure is a more holistic and long-term view of the impact of exchange rate fluctuations on a company's operations, competitiveness, and profitability. It can be a significant risk for multinational corporations that have significant exposure to international markets, supplies, customers, or competitors.

Question 13

The World Trade Organization is a new international body established to police world trading practices and to mediate disputes between member countries.

Accepted Answer

The statement is true. The World Trade Organization (WTO) was established in 1995 to replace the General Agreement on Tariffs and Trade (GATT) and has the authority to regulate and monitor international trade, as well as resolve trade disputes between member countries.

Question 14

A self-sustaining foreign subsidiary is one that is financially and operationally independent of the parent company.

Accepted Answer

A self-sustaining foreign subsidiary is able to operate and generate its own revenue without requiring constant financial support or involvement from the parent company.

Question 15

Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

Accepted Answer

Accounting exposure is indeed the risk arising due to changes in foreign exchange rates on the translated value of a firm's financial statements denominated in a particular foreign currency. It affects the company's reported earnings, balance sheet, and overall financial condition.

Question 16

In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.

Accepted Answer

The statement correctly describes the nominal interest rate in the international context.

Question 17

If a Canadian-based MNC with a subsidiary in Mexico expects the Mexican currency to appreciate in value relative to the Canadian dollar, local customers' accounts receivable would be increased and accounts payable would be reduced if at all possible.

Accepted Answer

If the Mexican currency appreciates relative to the Canadian dollar, it means that the Canadian dollar can buy fewer Mexican pesos. This would increase the value of local customers' accounts receivable (in pesos) when converted to Canadian dollars. On the other hand, accounts payable (paid in pesos) would be reduced in value when converted to Canadian dollars, so it would be beneficial to pay them off as soon as possible.

Question 18

When more units of a foreign currency are required to buy one dollar, the currency is said to have appreciated with respect to the dollar.

Accepted Answer

When more units of a foreign currency are required to buy one dollar, the currency has actually depreciated with respect to the dollar because it now takes more of that currency to purchase the same amount of dollars.

Quiz 19: International Corporate Finance