Question 1

Investors and firms who diversify their Canadian portfolios by buying foreign stocks or investing in foreign subsidiaries take on a much higher level of risk than if they had invested in domestic stocks or companies.

Accepted Answer

Diversifying portfolios by investing in foreign stocks or subsidiaries can actually reduce risk through exposure to different markets and economic conditions, potentially offsetting domestic market volatility.

Question 2

A money market hedge does not require the use of a futures exchange.

Accepted Answer

A money market hedge involves using a combination of currency borrowing and lending to achieve the desired hedge ratio. It does not involve trading futures contracts on a futures exchange.

Question 3

Eurobond issues are sold simultaneously in several national capital markets,but denominated in a currency different from that of the nation in which the bonds are issued.

Accepted Answer

Eurobond issues are typically denominated in a currency different from that of the nation in which the bonds are issued, and are sold simultaneously in multiple national capital markets.

Question 4

The eurobond market offers tax flexibility for borrowers and investors.

Accepted Answer

Eurobonds are usually issued in countries with favorable tax laws, which allows borrowers to take advantage of lower tax rates and provides investors with the opportunity to receive tax-free interest income.

Question 5

A forward rate reflects the future value of a currency based on expectations.

Accepted Answer

The answer of A forward rate reflects the future value...

Question 6

There is no guarantee that any currency will stay strong relative to other currencies,but the U.S.dollar is the exception.

Accepted Answer

There is no guarantee that any currency will stay strong relative to other currencies, including the U.S. dollar. Currency exchange rates are affected by various factors such as geopolitical events, economic policies, and market trends, and can fluctuate over time.

Question 7

The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.

Accepted Answer

The purchasing power parity theory suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.

Question 8

In international finance,the term "Balance of Payments" refers to the balance owing from one government to another.

Accepted Answer

The term "Balance of Payments" refers to the record of all economic transactions between the residents of one country and the rest of the world. It includes trade in goods and services, investment income, and transfers of funds. It is not just limited to government transactions, but includes transactions by private individuals and companies as well.

Question 9

A fronting loan is simply a parent's loan to its foreign subsidiary channelled through a financial intermediary,usually a large international bank.

Accepted Answer

A fronting loan involves a parent company lending to its foreign subsidiary through a financial intermediary. This is typically done through a large international bank.

Question 10

Why do foreign investments offer higher rates of return than the rate of return on domestic investments?

Accepted Answer

The answer of Why do foreign investments offer higher rates...

Question 11

Forward contracts tend to be created in organized exchanges like the International Money Market of the Toronto Futures Exchange.

Accepted Answer

While forward contracts can be created on organized exchanges, they are typically traded over-the-counter (OTC) rather than on an exchange.

Question 12

Japanese stocks typically have price-earnings multiples that are much higher than Canadian stocks.

Accepted Answer

This statement is generally true. Japanese stocks are known for their high valuations and often have higher price-earnings multiples compared to Canadian stocks.

Question 13

The most widely used currency in the Eurobond market is the euro.

Accepted Answer

The most widely used currency in the Eurobond market is the US dollar, not the euro.

Question 14

Expropriation is a form of transaction exposure.

Accepted Answer

Expropriation is a political risk where a government takes over private assets, while transaction exposure relates to the risk of exchange rate fluctuations affecting financial transactions.

Question 15

Transaction exposure associated with changes in the exchange rates between countries can be hedged with a currency futures contract.

Accepted Answer

Currency futures contracts can be used to hedge against transaction exposure, as they allow businesses to lock in a specific exchange rate for a future date. This can help mitigate the risk of losses from unfavorable exchange rate movements.

Question 16

Cash management considerations tend not to be the major determinants of transfer pricing policy.

Accepted Answer

Cash management considerations (such as managing working capital, currency fluctuations, and tax optimization) are important factors in transfer pricing, but they are not the major determinants of transfer pricing policy. Transfer pricing policy is mainly driven by the arm's length principle, which requires that transactions between related parties be conducted as if they were unrelated and independent parties dealing at arm's length. This principle aims to ensure that profits are allocated appropriately between related entities and that taxes are paid in the jurisdictions where the economic activity takes place.

Question 17

When a country has a weak currency relative to other countries,visiting that country is much more expensive for residents of other countries.

Accepted Answer

When a country has a weak currency relative to other countries, visiting that country is cheaper for residents of other countries as their currency will have more purchasing power in that country.

Question 18

A firm that might suffer a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures.

Accepted Answer

Selling Japanese yen futures would allow the firm to lock in a certain exchange rate for future transactions involving Japanese yen, thereby reducing the risk of potential losses due to a decline in the currency's value.

Question 19

Despite higher risks,what are 3 reasons foreign capital investments are undertaken?

Accepted Answer

The answer of Despite higher risks,what are 3 reasons foreign...

Question 20

The North American Free Trade Agreement (NAFTA)has opened up opportunities for truly competitive Canadian enterprises,while threatening the viability of others not able to match international levels of efficiency.

Accepted Answer

This statement accurately reflects the impact of NAFTA on Canadian businesses. While some companies have been able to thrive and compete on the international level, others have struggled to keep up and may have suffered as a result of increased competition.

Quiz 21: International Financial Management