Question 1

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be direct or indirect. Direct quotations express the value of one unit of domestic currency in terms of a foreign currency (e.g. 1 USD = 0.85 EUR), while indirect quotations express the value of one unit of foreign currency in terms of domestic currency (e.g. 1 EUR = 1.18 USD).

Question 2

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 techniques such as country risk analysis or scenario analysis. While it may not be fully negotiable, companies can take steps to mitigate or manage potential political risks.

Question 3

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

Accepted Answer

Most major industrialized nations currently operate under a system of floating exchange rates, where countries allow their currencies to fluctuate freely based on supply and demand in the foreign exchange market. However, some countries still use a fixed exchange rate or a managed float system.

Question 4

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

In hedging exchange rate exposure through forward contracts, individuals and corporations typically agree to buy or sell a currency at a future date at a predetermined rate. The goal is to protect against the risk of currency value fluctuations. If expecting a currency to depreciate, they might lock in a rate to sell that currency in the future; if expecting appreciation, they might lock in a rate to buy. The process does not involve simultaneously selling the currency expected to appreciate and buying the currency expected to depreciate.

Question 5

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 "relative purchasing power parity" theory, which suggests that exchange rates between two currencies will adjust to reflect the differences in inflation rates between the two countries. Generally, a currency with a higher inflation rate will decrease in value compared to a currency with a lower inflation rate over time.

Question 6

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 due to additional factors such as foreign exchange risk, cross-border legal and tax implications, and cultural differences. Advanced communications technology and standardization of procedures may help to some extent, but overall it remains a more challenging task.

Question 7

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 of less than one year.

Question 8

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 American 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.

Question 9

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 various currencies and exchange rates, which increases the risk of credit policy. Additionally, the creditworthiness of foreign customers may be unknown, leading to further uncertainty and risk.

Question 10

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, if you wanted to determine the exchange rate between the euro and the Japanese yen, you would use the US dollar as a base currency and calculate the cross rate between the euro and the dollar and the dollar and the yen.

Question 11

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

This statement is correct. If the forward exchange rate for a currency is lower (i.e. more of the foreign currency can be obtained per dollar) than the spot exchange rate, then the forward currency is said to be selling at a discount to the spot rate. This may occur due to various factors such as interest rate differentials, inflation expectations, and political or economic uncertainties.

Question 12

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

Exchange rate risk is indeed the risk that the cash flow from a foreign project will be worth less than projected due to exchange rate changes.

Question 13

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 14

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 statement is true. If the forward rate is higher than the spot rate, it means that the foreign currency is more expensive to buy in the future than it is to buy immediately, indicating a premium.

Question 15

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 create significant challenges for multinational corporations in coordinating and controlling their worldwide operations. These differences can affect areas such as taxation, labor laws, intellectual property protection, and trade policies, which require careful consideration and adaptation by corporations to ensure compliance and competitiveness in each country of operation.

Question 16

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 each other, not to smaller U.S. corporations.

Question 17

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 U.S. dollar appreciates in value against another country's currency, it means that each dollar can be exchanged for a larger amount of the foreign currency, allowing U.S. consumers to purchase more with the same amount of dollars.

Question 18

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 bank's lending rate and the rates on U.S. money market instruments.

Question 19

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 cause the value of inventory held in foreign currency to change, affecting a multinational firm's inventory valuation and costing decisions. This can also impact the overall financial performance of the company, as well as its ability to compete with local firms. Therefore, exchange rates play a critical role in a multinational firm's inventory policy.

Question 20

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

Accepted Answer

Multinational financial management involves managing financial operations across different countries with different currencies. Changes in currency values can have a significant impact on financial performance and must be carefully considered by financial analysts.

Quiz 17: Multinational Financial Management

Exchange rate quotations consist solely of direct quotations.

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

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

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.

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.

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

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.

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.

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

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.

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

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.

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.

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.

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.

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

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