Question 1

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

Accepted Answer

A Eurodollar is a U.S. dollar that is deposited in a non-U.S. bank, typically in Europe, thus the name Eurodollar.

Question 2

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 or corporations typically agree to buy or sell a currency at a future date, but not necessarily by selling the currency expected to appreciate and buying the one expected to depreciate. The strategy usually involves locking in an exchange rate for a currency they anticipate needing to convert in the future to avoid the risk of adverse currency movements.

Question 3

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

Accepted Answer

Multinational financial management involves dealing with various currencies, hence financial analysts must analyze the effects of changing currency values on investments and financial transactions.

Question 4

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

Accepted Answer

Political risk can be evaluated and addressed through various strategies such as diversification, insurance, and hedging. Therefore, it can be explicitly addressed in multinational corporate financial analysis.

Question 5

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, such as navigating different regulatory environments, currency fluctuations, and taxes across different countries.

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 currency exchange rates, international regulations, and cultural differences. While advanced communications technology and standardization can help to simplify certain processes, there are still unique challenges that arise in managing working capital for multinational firms.

Question 7

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 8

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct or indirect quotations, depending on the convention used in the particular market or country. Direct quotation is when the domestic currency is the base currency and the foreign currency is the quoted currency. Indirect quotation is when the foreign currency is the base currency and the domestic currency is the quoted currency.

Question 9

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 based on the theory of purchasing power parity, which suggests that inflation rates equalize exchange rates in the long run. If a country has higher inflation than the U.S., its currency is expected to depreciate to counteract the difference in purchasing power.

Question 10

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 an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, the forward currency is trading at a lower price (discount) compared to the spot rate.

Question 11

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

Accepted Answer

The United States and most other major industrialized nations currently operate under a system of floating exchange rates, where the value of their currency is determined by supply and demand in the foreign exchange market. This is in contrast to a fixed exchange rate system, where the value of the currency is set at a fixed rate by the government or central bank.

Question 12

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 not an average of interest rates offered by London banks to smaller U.S. corporations, but rather an average of interest rates offered by London banks to each other for short-term loans.

Question 13

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.

Question 14

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 refers to the possibility of loss due to fluctuations in currency values. When a company invests in a foreign project, any cash flows generated in foreign currency must be converted into the parent company's currency, and this conversion may result in unexpected losses due to unfavorable exchange rate fluctuations. Thus, statement "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" is true.

Question 15

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 is a correct statement. If the forward currency is more expensive than the spot currency, then it is selling at a premium to the spot rate.

Question 16

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

Credit policy for multinational firms is generally more risky due to the additional consideration of exchange rates and uncertainty regarding the creditworthiness of foreign customers. This additional complexity increases the risk of non-payment and losses for multinational firms.

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 primarily a short-term market, with most loans and deposits having maturities of less than one year.

Question 18

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 affect the value of a multinational firm's inventory. For example, if a company's inventory is stored in a foreign country and the value of that country's currency decreases, the inventory may become cheaper in the company's home currency, leading to possible overstocking. On the other hand, if the value of the foreign currency increases, the inventory may become more expensive, leading to possible understocking. Therefore, exchange rates play a significant role in a multinational firm's inventory policy.

Question 19

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, or the seizure of a company's assets by a government, can make multinational firms hesitant to invest in certain countries. This can lead to a strategy of minimizing inventory holdings in those countries and only bringing in goods as needed, in order to reduce the potential loss in case of expropriation.

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 is true. A currency cross rate involves calculating the exchange rate between two currencies, neither of which is the domestic currency, by using a third currency as a base.

Quiz 27: Multinational Financial Management