Question 1

A multinational corporation is involved in a country whose currency is likely to decline in value.The corporation should

Accepted Answer

The answer of A multinational corporation is involved in a...

Question 2

Which of the following is a reason for international investment?

Accepted Answer

International investment can be used to diversify an investor's portfolio and reduce risk by spreading investments across different countries and economies.

Answer: C 
 International investment can also be used to gain a competitive advantage in a foreign country, such as access to cheaper labor, resources, or markets. This can benefit companies seeking to expand their business globally.

Answer: D 
 International investment also provides the opportunity to gain access to foreign currencies, which can offer potentially higher returns or provide a hedge against currency fluctuations.

Question 3

Leading and lagging

Accepted Answer

Leading and lagging are important risk-reduction techniques that can be applied for an MNC. These techniques involve managing the timing of cash flows to take advantage of exchange rate fluctuations. They are useful when hedging is not available or is too expensive, and can help reduce the risk of currency fluctuations. Therefore, option D - all of the above - is the correct answer.

Question 4

A currency swap is the exchange of principal and interest in one currency for the same in another currency for an agreed period of time.

Accepted Answer

This is the correct definition of a currency swap.

Question 5

The transfer of funds among subsidiaries and the parent company of a multinational corporation is achieved by which of the following methods?

Accepted Answer

The answer of The transfer of funds among subsidiaries and...

Question 6

With international investing,unlike domestic investing,exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

Accepted Answer

Exchange rate risk is an additional risk that is not present in domestic investing. It could potentially cause a marginally positive-NPV project to become negative in terms of value due to the uncertainty in exchange rates. Hence, it could lead to such projects being rejected by investors.

Question 7

An important (additional)consideration for a direct foreign investment is

Accepted Answer

Political risk is an important consideration for direct foreign investment because it refers to the potential negative impacts on a company's operations resulting from political instability or change in the foreign country of investment. Identifying and mitigating political risks can help avoid potential losses and ensure the success of the investment. Maxmizing the firm's profits, attaining a high international P/E ratio, and maintaining the domestic cost of capital are all important goals for the firm, but they are not specific considerations for direct foreign investment.

Question 8

Exchange-rate risk arises from the fact that the spot exchange rate on a future date is unknown today.

Accepted Answer

Exchange-rate risk is the risk that a company or investor may face due to fluctuations in the value of one currency relative to another. This risk arises from the fact that the spot exchange rate (the price at which one currency can be exchanged for another) on a future date is unknown today. Therefore, A is the correct answer.

Question 9

The rate that a subsidiary or parent of the MNC charges other divisions of the firm for its products is called

Accepted Answer

The correct term used to describe the rate that a subsidiary or parent of the MNC charges other divisions of the firm for its products is a transfer price. Choice A is incorrect because a forward price is a contract to buy or sell assets at a future date for a specified price. Choice B is a broad term that refers to transactions that occur within a company, but it does not specifically refer to transfer pricing. Choice D is incorrect because an exchange rate is the rate at which one currency can be exchanged for another.

Question 10

The objective of hedging strategy is to have a zero net asset position in a foreign currency.

Accepted Answer

Hedging is a strategy used to reduce risk by offsetting the potential losses in one investment with the potential gains in another investment. In the case of foreign currency hedging, the objective is to have a zero net asset position in a foreign currency, meaning that the value of the assets in the foreign currency is equal to the value of the liabilities in the foreign currency. This is done to eliminate the risk of exchange rate fluctuations.

Question 11

If a foreign currency is expected to depreciate with respect to the home currency,the holder of a net liability in foreign currency will profit.

Accepted Answer

When a foreign currency depreciates, it becomes less valuable compared to the home currency. This means that the holder of a net liability in foreign currency will have to pay back less of the home currency to settle the liability, resulting in a profit.

Question 12

Exchange rate risk is the risk that exchange rates will be lower in the future than they are today.

Accepted Answer

Exchange rate risk refers to the possibility of currency fluctuations that may cause an investor to lose money. It includes the risk of exchange rates being higher or lower in the future, not just lower.

Question 13

A multinational corporation can move funds from a subsidiary in one country to a subsidiary in another country so foreign exchange exposure and the tax liability of the multinational corporation as a whole are minimized.

Accepted Answer

This statement is true. Multinational corporations often engage in financial management strategies such as cash pooling and transfer pricing to centralize cash and reduce foreign exchange exposure and tax liability. This involves moving funds from subsidiaries in different countries to a central account or to other subsidiaries in countries with favorable tax rates.

Question 14

A major source of long-term capital overseas is in the Eurocurrency market.

Accepted Answer

The answer of A major source of long-term capital overseas...

Question 15

Exchange rate risk exists for a party to a contract if the contract is denominated in a foreign currency.

Accepted Answer

Exchange rate risk occurs when there is uncertainty in the future value of a foreign currency, which can affect the value of a contract denominated in that currency.

Question 16

The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

Accepted Answer

The cost of debt used in international investment decisions is typically the cost of debt of the entity actually borrowing the funds, which could be either the parent or the subsidiary, depending on the specific circumstances of the investment, not necessarily the lesser of the two.

Question 17

Exchange rate risk exists in International Trade Contracts,Foreign Portfolio Investments,and in Direct Foreign Investments.

Accepted Answer

Exchange rate risk is a real possibility in all international business transactions and investments, including international trade contracts, foreign portfolio investments, and direct foreign investments. Changes in exchange rates can significantly impact the profitability and financial stability of these transactions and investments.

Question 18

Only purely domestic firms that buy all of their inputs and sell all of their outputs in their home countries are unaffected by events in international financial markets.

Accepted Answer

Even purely domestic firms can be affected by events in international financial markets indirectly through changes in exchange rates, interest rates, and inflation rates. These factors can affect the domestic economy and have an impact on the pricing and availability of inputs and outputs. Additionally, changes in international financial markets can affect the domestic economic policies and regulations that impact purely domestic firms.

Question 19

A company holding a net asset position in a depreciating currency should lead,and a company holding a net asset position in an appreciating currency should lag.

Accepted Answer

This statement is true. When a company holds a net asset position in a depreciating currency, the value of those assets decreases over time. Therefore, they should lead - meaning they should take action to mitigate the impact of currency depreciation on their financial position. On the other hand, a company holding a net asset position in an appreciating currency sees the value of their assets increase over time. Therefore, they can afford to lag - meaning they can delay taking action to mitigate the impact of currency appreciation on their financial position.

Question 20

All of the following are examples of political risk for a U.S.company investing in a foreign country except:

Accepted Answer

The other options (expropriation, blocked funds, changes in tax laws) are all examples of political risk that a U.S. company could face when investing in a foreign country. However, government requirements that ownership be limited to U.S. citizens is not a political risk, but rather a restriction or limitation on the investment opportunity.

Quiz 17: International Business Finance