Question 1

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

Accepted Answer

The Eurodollar market is actually a short-term market, with most loans and deposits having maturities of less than one year.

Question 2

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.

Accepted Answer

This is correct. When the forward currency is more expensive than the spot currency, it is said to be selling at a premium.

Question 3

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.

Accepted Answer

A currency is said to be selling at a discount if the forward rate is lower than the spot rate, meaning that an investor can get more foreign currency for a dollar in the future than they can currently in the spot market.

Question 4

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct quotations or indirect quotations. Direct quotations are quoted in terms of domestic currency per unit of foreign currency, whereas indirect quotations are quoted in terms of foreign currency per unit of domestic currency.

Question 5

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

Accepted Answer

This is true. A currency cross rate involves using a third currency as a base to determine the exchange rate between two currencies. For example, to calculate the exchange rate between EUR/JPY, one may use the USD as a base currency by converting the EUR/USD and JPY/USD exchange rates.

Question 6

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

Accepted Answer

The United States and most other major industrialized nations currently operate under a system of floating exchange rates. This means that the exchange rate of a currency is determined by the supply and demand in the foreign exchange market, rather than being fixed by a government's monetary policy.

Question 7

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.

Accepted Answer

The threat of expropriation, which is the act of a government taking ownership of privately owned assets or property, can create uncertainty and risk for multinational firms operating in certain countries. As a result, the firm may be incentivized to minimize inventory holdings in those countries and to only bring in goods as needed in order to reduce the amount of assets that could potentially be expropriated.

Question 8

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

Accepted Answer

A Eurodollar is indeed a U.S. dollar deposited in a non-U.S. bank, typically in Europe.

Question 9

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.

Accepted Answer

This is an accurate description of exchange rate risk.

Question 10

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.

Accepted Answer

LIBOR is an average of interest rates offered by London banks to other large global banks. It is not specific to U.S. corporations or limited to smaller ones.

Question 11

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.

Accepted Answer

Legal and economic differences among countries can pose significant problems for multinational corporations when they try to coordinate and control worldwide operations of subsidiaries. These differences can affect everything from taxation and regulation to labor laws and cultural norms, making it difficult to create consistent policies and practices across different regions. Multinational corporations must carefully navigate these differences to avoid legal and financial risks, as well as reputation damage.

Question 12

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.

Accepted Answer

When the value of the U.S. dollar appreciates against another country's currency, it means that one dollar can buy more units of the foreign currency than before, allowing for the purchase of more foreign currency with the same amount of dollars.

Question 13

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

Accepted Answer

Multinational companies operate in multiple countries and conduct transactions in different currencies, so financial analysts must take into account the effects of fluctuating exchange rates on their finances. This is crucial for planning and decision-making related to investments, hedging, and risk management.

Question 14

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.

Accepted Answer

Multinational firms may face additional risks related to exchange rate fluctuations and uncertainty about the creditworthiness of foreign customers, which can make their credit policy more risky than that of domestic firms.

Question 15

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

Accepted Answer

Political risk can be explicitly addressed in multinational corporate financial analysis through various methods such as scenario analysis, country risk ratings, and insuring against political risks.

Question 16

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.

Accepted Answer

This statement is known as the International Fisher Effect, which suggests that currencies with higher inflation rates will typically depreciate relative to currencies with lower inflation rates.

Question 17

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

Accepted Answer

When a multinational firm deals with inventory, the value of inventory is affected by changing currency values. As a result, exchange rates play a significant role in determining the inventory policy of a multinational company. Consequently, companies may adopt strategies to mitigate the effects of currency fluctuations, such as hedging, currency diversification, or adjusting pricing policies to account for exchange rate changes.

Question 18

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.

Accepted Answer

Working capital management for multinational firms is more complex than it is for large domestic firms. Multinational firms have to deal with additional challenges such as exchange rate risk, cross-border regulations, and cultural differences. Therefore, advanced communications technology and standardization of general procedures do not completely simplify the process.

Question 19

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.

Accepted Answer

Forward currency transactions involve locking in an exchange rate for the purchase or sale of a currency on a future date, typically to hedge against exchange rate fluctuations. However, the strategy does not necessarily involve simultaneously selling the currency expected to appreciate and buying the currency expected to depreciate. Instead, it involves agreeing to exchange currencies at a future date at a rate decided now, based on the hedging needs related to anticipated currency exposures.

Question 20

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.

Accepted Answer

In a situation where the United States is running a trade deficit with China, it means the US is importing more from China than it is exporting to China. This would typically lead to a higher demand for Chinese yuan (to pay for the imports) and a lower demand for the US dollar (since China needs fewer dollars to buy US goods). As a result, we would expect the value of the Chinese yuan to appreciate, not depreciate, against the US dollar in a free market scenario.

Quiz 17: Multinational Financial Management