Question 1

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

Accepted Answer

LIBOR is an average of interest rates offered by London banks to other large, international banks. It is not specific to North American corporations.

Question 2

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

Although multinational corporations may have strategies in place to navigate legal and economic differences across countries, these differences can still pose significant challenges and obstacles to coordinating and controlling subsidiaries worldwide. The varying regulations, cultural norms, and economic realities in different countries can impact everything from supply chain management to marketing strategies.

Question 3

The Eurocurrency market is essentially a long-term market; most loans and deposits in this market have maturities longer than 1 year.

Accepted Answer

The Eurocurrency market is actually a short-term market where most loans and deposits have maturities less than 1 year.

Question 4

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

Accepted Answer

Multinational financial management involves dealing with financial operations across different countries, which means that analysts must take into account currency fluctuations and their potential impact on cash flows, revenues, expenses, and profits. Changes in exchange rates can affect a company's competitiveness, pricing strategy, cost of capital, and hedging decisions, among other factors. Thus, a thorough understanding of foreign exchange risks and opportunities is essential in global finance.

Question 5

On average, foreign currency will depreciate against the Canadian dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of Canada.

Accepted Answer

This is known as the relative purchasing power parity theory, which suggests that exchange rates will adjust to reflect the difference in inflation rates between two countries. If a foreign country has a higher inflation rate than Canada, its currency will depreciate against the Canadian dollar to maintain parity in purchasing power.

Question 6

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

Accepted Answer

This is correct. If the forward exchange rate for a foreign currency is higher than the spot exchange rate, it means that the foreign currency is selling at a premium to the spot rate. This indicates that the market expects the value of the foreign currency to appreciate in the future compared to the dollar.

Question 7

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

Accepted Answer

Exchange rate fluctuations can change the value of inventory, making it necessary for multinational firms to consider the impact of currency movements on their inventory policies. For example, if a company holds inventory in a different currency than the one it operates in, a change in exchange rates can affect the cost of that inventory and potentially impact the firm's profitability. As a result, multinational companies need to account for exchange rate risk when making inventory decisions.

Question 8

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 confiscation of a foreign company's assets by a host government, creates uncertainty and risk for multinational firms operating in certain countries. This may lead to a strategy of minimizing inventory holdings in those countries and bringing in goods only as needed to reduce the potential loss in case of expropriation.

Question 9

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

Accepted Answer

Canada and most other major industrialized nations do indeed operate under a system of floating exchange rates, where the value of a country's currency fluctuates based on market forces such as supply and demand. This is in contrast to a fixed exchange rate system where a currency's value is tied to a specific commodity or another currency.

Question 10

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct or indirect. Direct quotations give the price of one unit of foreign currency in terms of the domestic currency, while indirect quotations give the price of one unit of domestic currency in terms of the foreign currency.

Question 11

Exchange rate risk refers to the risk that 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 fluctuations.

Accepted Answer

Exchange rate risk is a real concern for multinational corporations because fluctuations in currency exchange rates can significantly impact the value of their international investments and cash flows. If the exchange rate of the foreign currency to the parent company's currency changes, the value of cash flows from the foreign project can either increase or decrease, which can affect the profitability and financial performance of the company.

Question 12

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 correct. For example, to calculate the cross rate between the British Pound (GBP) and the Japanese Yen (JPY) when the USD is the base currency, one would need to convert both the GBP and JPY into USD and then divide the USD/JPY rate by the USD/GBP rate.

Question 13

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

Accepted Answer

When the foreign currency is trading at a forward rate lower than the spot rate, it is said to be selling at a discount. This means that the investor can buy more foreign currency for a dollar in the future than they can currently in the spot market.

Question 14

A Eurocanadian is Canadian dollar deposited in a bank outside Canada.

Accepted Answer

The answer of A Eurocanadian is Canadian dollar deposited in...

Question 15

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 can be more complex due to additional factors such as foreign currency exchange rates, international regulations, and cultural differences. These factors can impact cash flows, inventory management, and payment terms. Therefore, multinational firms may require specialized expertise and systems to manage their working capital effectively.

Question 16

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 17

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

Accepted Answer

Exchange rates can fluctuate and impact the value of payments received from foreign customers, leading to higher risk. Additionally, creditworthiness of foreign customers may be difficult to assess due to different legal and financial systems in other countries. These factors combined make credit policy for international firms more risky than domestic firms.

Question 18

If Canada 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 Canadian dollar.

Accepted Answer

In a free market, if Canada is running a trade deficit with China, it means Canada is importing more from China than it is exporting to China. This would typically lead to a higher demand for Chinese yuan and a lower demand for Canadian dollars, causing the value of the Chinese yuan to appreciate, not depreciate, against the Canadian dollar.

Question 19

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

Accepted Answer

Political risk can be addressed in international corporate financial analysis through various methods such as country risk assessment, political risk insurance, and hedging strategies. It is important for companies to consider political risk as it can have a significant impact on their financial performance in foreign markets.

Question 20

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

Accepted Answer

When the Canadian dollar appreciates, it means its value has increased compared to another currency. This means we can buy more of the other currency with our Canadian dollars.

Quiz 22: International Financial Management