Question 1

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

Accepted Answer

Eurodollars are U.S. dollars that are deposited in banks outside of the United States, typically in Europe.

Question 2

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 3

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

This is because if a multinational firm has a high level of inventory in a country where expropriation may be a risk, then they could stand to lose a significant amount of inventory value if expropriation occurs. Therefore, by minimizing inventory holdings, they may limit this risk.

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

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 5

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 6

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

Accepted Answer

While political risk may not be completely negotiable, it can be addressed through various strategies such as diversification, insurance, and contingency planning. Therefore, it can be explicitly addressed in multinational corporate financial analysis.

Question 7

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

Accepted Answer

Multinational financial management involves dealing with multiple currencies, and changes in currency values can have significant impacts on financial decisions and outcomes. Therefore, financial analysts must consider these effects in their analyses and decisions.

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 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 9

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, which can lead to changes in a multinational firm's inventory policy. For example, if the value of a currency decreases, the cost of inventory purchased in that currency will increase, which may lead to a firm purchasing less inventory to avoid higher costs.

Question 10

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be given in both direct and indirect quotations. Direct quotation indicates the domestic currency price of one unit of foreign currency while indirect quotation indicates the foreign currency price of one unit of domestic currency.

Question 11

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 the definition of exchange rate risk.

Question 12

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 involves additional complexities such as foreign exchange risks, different tax laws, and cultural differences, making it more complex than for large domestic firms. While technology has improved the communication and standardization of procedures, it does not eliminate these additional challenges.

Question 13

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 phenomenon is known as the International Fisher Effect (IFE), which suggests that the difference in inflation rates between two countries will be offset by an equal but opposite change in the exchange rate between their currencies. Therefore, if a country has a higher inflation rate than the United States, its currency is expected to depreciate against the dollar at a rate roughly equal to the difference in inflation rates.

Question 14

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 lead to difficulties in complying with local regulations, managing currency exchange rates, and navigating cultural differences. Therefore, it is important for multinational corporations to have strategies in place to address these challenges.

Question 15

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 operate in multiple countries and deal with customers who may have different credit worthiness and operate in different currencies, which increases the risk involved in their credit policy. Exchange rate fluctuations also add an additional layer of risk.

Question 16

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 is calculated by using a third currency as a bridge to determine the exchange rate between two other currencies. This can be done by multiplying the exchange rate of one currency with the exchange rate of another currency through the third currency.

Question 17

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 18

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

Accepted Answer

The United States and other major industrialized nations operate under a system of floating exchange rates, which means that the value of currencies is determined by the open market and supply and demand. This is in contrast to a fixed exchange rate system, where governments or central banks set the value of their currency relative to another currency or commodity.

Question 19

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

If the forward currency rate is higher than the spot currency rate, it is said to be trading at a premium. If the forward currency rate is lower than the spot currency rate, it is selling at a discount.

Question 20

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 will buy fewer units of a foreign currency in the forward market than in the spot market, it means that the forward currency is more expensive than the spot currency. This is known as a forward premium and indicates that there is a greater demand for the currency in the future.

Quiz 17: Multinational Financial Management