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, where most loans and deposits have maturities ranging from overnight to one year.

Question 2

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 due to factors such as currency exchange rates, different legal systems, and varying tax regulations. These factors require additional planning and management compared to large domestic firms.

Question 3

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S. money market instruments.

Accepted Answer

The interest rate paid on Eurodollar deposits is influenced by the individual bank's lending rate as well as prevailing rates on U.S. money market instruments.

Question 4

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

When a forward currency is cheaper (in terms of domestic currency) than the spot rate, it is said to be selling at a discount. This means that an investor can buy more of the foreign currency in the forward market for a dollar than in the spot market.

Question 5

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 a correct definition of exchange rate risk. It refers to the risk of uncertainty in the value of future cash flows due to changes in the exchange rates between two currencies.

Question 6

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

Accepted Answer

Most major currencies are allowed to fluctuate in value relative to each other based on market forces, rather than being fixed to a specific value or being pegged to another currency.

Question 7

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

Accepted Answer

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

Question 8

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 is known as the international Fisher effect, which suggests that the difference in inflation rates between two countries will be offset by a change in the exchange rate between their currencies. If one country's inflation rate is higher than that of another country, its currency will depreciate against that country's currency to maintain parity in purchasing power.

Question 9

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 international banks. It is not specifically related to smaller U.S. corporations.

Question 10

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct or indirect. Direct quotation is the price of a unit of foreign currency in terms of the home currency, while indirect quotation is the price of the home currency in terms of the foreign currency.

Question 11

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

Accepted Answer

Political risk can be addressed in multinational corporate financial analysis through various strategies such as diversification of operations in different countries, political risk insurance, and hedging. Therefore, it is negotiable and can be explicitly addressed in financial analysis.

Question 12

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 13

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

Accepted Answer

Fluctuations in exchange rates can impact the value of inventory, especially for multinational firms that have operations in multiple countries with different currencies. For example, if a firm imports goods from a country with a weaker currency, a rise in the value of the local currency could increase the cost of inventory. Similarly, if a firm exports goods to a country with a stronger currency, a drop in the value of the local currency could result in lower revenue from selling inventory. As a result, multinational firms need to consider exchange rate fluctuations when deciding on inventory policies, such as when to buy, how much to buy, and where to store inventory.

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 have to deal with different currencies and foreign markets, which increases the risk associated with credit policy. Additionally, they may face challenges in assessing the creditworthiness of their foreign customers. Therefore, credit policy for multinational firms is generally more risky.

Question 15

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 16

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

When a dollar buys fewer units of a foreign currency in the forward market than in the spot market, it means that the forward currency is more expensive, or at a premium, compared to the spot rate.

Question 17

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 pose significant problems for multinational corporations in coordinating and controlling worldwide operations of subsidiaries. Companies must navigate different laws and regulations, cultural differences, and economic systems, which can impact their operations and profitability.

Question 18

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

Accepted Answer

Multinational financial management involves dealing with multiple currencies, hence changes in currency values need to be considered while making financial decisions.

Question 19

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.

Question 20

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

Accepted Answer

This statement is true. A currency cross rate is calculated by using a third currency as a base to determine the exchange rate between two currencies. For example, if you want to calculate the exchange rate between the euro and yen, you would use the US dollar as the base currency and determine the exchange rates for EUR/USD and USD/JPY to arrive at the EUR/JPY cross rate.

Quiz 17: Multinational Financial Management

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

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.

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S. money market instruments.

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.

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.

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

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

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.

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.

Exchange rate quotations consist solely of direct quotations.

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

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.

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

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.

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.

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.

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.

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

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.

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