Deck 21: International Financial Management

Question 1

A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the least amount of political risk.

Answer 1

True

Question 2

Translation exposure occurs because of changes in foreign exchange rates.

Answer 2

True

Question 3

The dependence of lesser developed countries on self-sufficient countries such as the U.S. and Canada is the basis for the need for sound international business relations.

Answer 3

False

Question 4

Transaction exposure results in foreign exchange gains and losses.

Question 5

A foreign exchange rate is the rate at which a foreign currency changes relative to the dollar.

Question 6

In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank.

Question 7

Foreign exchange risk is the risk that a person or business will not be able to exchange currencies.

Question 8

Multinational firms tend to have a lower level of portfolio risk than comparable Canadian firms.

Question 9

A foreign affiliate lowers the portfolio risk of its parent company because the foreign and domestic economies tend to be fairly similar.

Question 10

A forward exchange rate is used to help determine the value of a currency at a future point in time.

Question 11

The European Common Market was formed to promote better trade relations among major industrial nations of the world.

Question 12

In recent years, fully owned foreign subsidiaries are experiencing increased political pressure from foreign governments.

Question 13

An exporter is able to satisfy foreign demand for a product while avoiding long-term investment although this method is riskier than other alternatives.

Question 14

Balance of payments is a method of keeping the foreign exchange market in equilibrium.

Question 15

The Purchasing Power Parity Theory states that currency exchange rates tend to vary inversely with their respective purchasing powers in order to provide similar purchasing powers.

Question 16

Currency exchange rates may be either floating or fixed.

Question 17

In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from the parent company to the subsidiary.

Question 18

When a bank issues a letter of credit the bank absorbs ALL of the credit risk to the exporter.

Question 19

A foreign affiliate may be an exporter, a joint venture, or a fully owned foreign subsidiary.

Question 20

Canada is the world's major importer and exporter, and has by far the greatest investment in foreign countries.

Question 21

The North American Free Trade Association (NAFTA) continues to generate more foreign trade despite some negative political views.

Question 22

Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes risk for any multinational corporation.

Question 23

A bear market (declining stock prices) will tend to exert a depressing effect on the value of a country's currency.

Question 24

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

Question 25

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

Question 26

Because of political risk, it is generally disadvantageous for Canadian firms to list their stocks on the world stock exchanges.

Question 27

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.

Question 28

The rise of the euro market makes the world's three most important currencies the U.S. dollar, the euro, and the Japanese yen.

Question 29

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

Question 30

The U.S. is the largest creditor nation in the world.

Question 31

Expected future value of a currency is reflected in its spot rate.

Question 32

The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.

Question 33

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

Question 34

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.

Question 35

Due to such problems as the accumulated federal debt and the lingering balance of payments deficit, interest rates in Canada have remained high to satisfy foreign investors.

Question 36

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

Question 37

In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate.

Question 38

The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time.

Question 39

A large portion of the massive Canadian federal budget deficits incurred during the late 1980s and early 1990s were financed by foreign investors.

Question 40

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.

Question 41

The current spot exchange rate between the Japanese yen and the Canadian dollar is Y 105/$. The yen is expected to appreciate by 5% against the dollar over the next six months. What do you expect the spot exchange rate between the yen and the dollar to be six months from now?

A) Y 94.50/$
B) Y 99.75/$
C) Y 110.25/$
D) Y 115.50/$

Question 42

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

A) Purchasing Power Parity Theory.
B) Balance of Payments.
C) Interest Rate Parity Theory.
D) none of the other answers are correct

Question 43

The value of a country's currency may increase by

A) continuous excessive government spending.
B) a stock market rally in that country.
C) an increase in that country's money supply.
D) more than one of the other answers is correct.

Question 44

While shopping in the Mexican market, you find that limes cost 12 pesos each. You remember that back home they cost 60 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

A) 20 pesos/dollar or 5 cents/peso.
B) 80 pesos/dollar or 1.25 cents/peso.
C) 5 pesos/dollar or 20 cents/peso.
D) not enough information to tell

Question 45

You are leaving Mexico and have 3,500 pesos to change into dollars. The exchange rate is now 1,500 pesos to the dollar. How many dollars will you receive?

A) $ 0.43
B) $ 2.33
C) $300.00
D) not enough information to tell

Question 46

The following are the prices in the foreign exchange market between the Canadian dollar and another local currency (LC). $$\begin{array} { l l } \text { Spot } & \$ 0.02465 / \mathrm { LC } \\\text { 3-month forward } & \$ 0.02473 / \mathrm { LC } \\\text { 6-month forward } & \$ 0.02474 /\mathrm { LC }\end{array}$$ What was the discount or premium on 3-month forward for LC?

A) 1.298% premium
B) 0.0325% premium
C) 0.0325% discount
D) 1.298% discount

Question 47

A multinational corporation may be defined as

A) a company which owns property in a foreign country.
B) a company which hires foreign labourers.
C) a company which carries on some business activity outside of its own national borders.
D) more than one of the other answers are correct

Question 48

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.

Question 49

A particular country's pattern of importing more than is being exported is likely to

A) depress that country's currency.
B) depress other countries' currencies.
C) increase the value of that country's currency.
D) more than one of the other answers is true

Question 50

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

A) foreign exchange risk.
B) political risk.
C) translation exposure.
D) none of the other answers are correct

Question 51

Which of the following hedging strategies is not used to minimize transaction exposure?

A) eurobond market
B) forward exchange market
C) money market
D) currency futures market

Question 52

Multinational corporations may take several forms. An exporter could be described as

A) an MNC which produces a product within its own borders, but sells in a foreign market.
B) the least risky political arrangement.
C) an MNC willing to commit itself to a long-term foreign investment.
D) more than one of the other answers are true

Question 53

Which of the following statements about forward exchange rates is false?

A) they reduce uncertainty about future value of currencies
B) they reflect expectations about the future value of currencies
C) they are usually slightly lower than the spot rate
D) all of the other answers are true

Question 54

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

Question 55

You are on your way to the beautiful Mexican resort of Zijuatenejo. The current exchange rate is 5000 pesos to the dollar. When you arrive, you convert $1,000 for how many pesos?

A) 500,000
B) 50
C) .005
D) not enough information to tell

Question 56

A form of MNC which exposes the firm to the least amount political risk, and is therefore the preferred arrangement by both business and foreign governments is called a (an)

A) exporter.
B) licensing agreement.
C) joint venture.
D) fully-owned foreign subsidiary.

Question 57

A fully owned foreign subsidiary is a form of MNC in which

A) a local entrepreneur buys the firm in that foreign country.
B) the MNC owns and operates the firm by itself.
C) the foreign government gives its full cooperation.
D) none of the other answers are true

Question 58

In a licensing agreement, the multinational corporation will very likely

A) be able to compete with the local domestic manufacturers.
B) experience import restrictions imposed by the foreign government.
C) allow a foreign firm to use its technology in exchange for a fee.
D) none of the other answers are true

Question 59

Which of the following is NOT an accusation made against MNCs by foreign countries?

A) MNCs cause instability in their currencies in international money and foreign exchange markets
B) MNCs contribute to unemployment and avoid taxes
C) MNCs exploit local labour with low wages
D) all of the other answers are true

Question 60

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

Question 61

To minimize exposure to political risk, a multinational firm may establish a joint venture with a local entrepreneur, establish a joint venture with a group of multinationals, or

A) purchase an insurance policy from the Export Development Corporation.
B) hedge in the Eurodollar market.
C) purchase an insurance policy from the Canada Revenue Agency.
D) any combination of the other answers

Question 62

A portfolio of international stocks in comparison to purely Canadian stocks generally shows

A) lower percentage risk for a given number of stocks.
B) higher percentage risk for a given number of stocks.
C) the same percentage risk for a given number of stocks.
D) lower percentage return for a given number of stocks.

Question 63

Which of the following is not a reason for Canadian firms operating in foreign markets?

A) less expensive labour
B) better economic and political environment
C) tax incentives
D) achieve international diversification

Question 64

A loan arrangement in which a parent company reduces its political risk over a direct transfer of funds is called a (an)

A) parallel loan.
B) EDC direct loan.
C) fronting loan.
D) it depends on the host country

Question 65

Which of the following is not an advantage of borrowing on the Eurodollar market?

A) greater availability of credit
B) lower overhead costs for lending banks
C) absence of compensating balance requirements
D) constant lending rate over time

Question 66

The Chinese renminbi is selling for $0.1652 and the British pound is selling for $1.6581. The cross rate between the renminbi and the pound is

A) 10.04.
B) 0.1004.
C) 9.96.
D) 0.0996.

Question 67

Which of the following statements about the International Finance Corporation is not true?

A) the decision to assist a venture depends on both profitability of the project and potential benefit to the host country's economy
B) IFC assumes no managerial responsibility and exercises no voting rights
C) IFC may either buy equity shares or provide long-term loans
D) all of the other answers are true

Question 68

Some MNCs may have difficulty raising equity capital in world market for all of the following reasons EXCEPT

A) language barrier.
B) foreign investors prefer capital gains over dividends.
C) common stock ownership among individuals may be uncommon.
D) the role of commercial banks throughout Europe in the issuing of new securities.

Question 69

The spot rate of the British pound to the dollar is 1.68 ($/£,). The 180 day forward rate is $1.71, the annualized forward premium is

A) 1.018%.
B) 3.636%.
C) 7.273%.
D) 2.036%.

Question 70

Which of the following factors will not increase the value of a currency in foreign markets?

A) high interest rates
B) high inflation
C) positive balance of payments
D) strong stock market rally

Question 71

If prices double in Vancouver while the prices in San Paulo remain the same, the purchasing power of the dollar relative to the real

A) should increase by 50%.
B) should increase by 100%.
C) should decrease by 50%.
D) should decrease by 100%.

Question 72

A loan arrangement between a parent company and its foreign affiliate which avoids the exchange markets entirely is called a

A) parallel loan.
B) EDC direct loan.
C) fronting loan.
D) could be any one depending on the circumstances

Question 73

Foreign business operations are more complex than domestic operations because

A) the rate of inflation may be higher than that of Canada.
B) the rules of taxation are different.
C) the financial markets vary from country to country.
D) all of the other answers are correct

Question 74

A long-term debt issue sold simultaneously in several different national capital markets, but denominated in a currency different than the nation of that issue is called a(an)

A) world bond.
B) international capital bond.
C) floating bond.
D) eurobond.

Question 75

Which of the following hedging strategies involves a loan without a futures contract?

A) eurobond market
B) forward exchange market
C) money market
D) IMM contract

Question 76

Which of the following statements about foreign affiliates is (are) true?

A) in general, foreign affiliates are more profitable than domestic businesses
B) foreign affiliates usually lower the portfolio risk of the parent company
C) foreign affiliates may have a significant positive impact on the host company's economic growth, employment, trade, and balance of payments
D) all of the other answers are true

Question 77

Which of the following statements is not true?

A) the currency of Japan is described in yens
B) the currency of Mexico is described in pesos
C) the currency of Italy is described in euros
D) the currency of Denmark is described in rands

Question 78

What has motivated Canadian firms to move their operations to foreign countries?

A) trade barriers, lower production costs, access to skilled workers, Canadian tax deferral
B) trade barriers, lower production costs, access to natural resources and manufacturing
C) import tariffs, foreign unions, foreign technology, expropriation
D) lower production costs, tax deferral, access to natural resources and manufacturing, expropriation

Question 79

If the Brazilian real is equal to $0.46, a Canadian dollar is equal to how many Brazilian reals?

A) 1.36
B) 1.96
C) 2.17
D) 0.38

Question 80

Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?

A) hedging in the foreign exchange market
B) hedging in the money market
C) hedging in the stock market
D) hedging in the currency futures market