Deck 21: International Financial Management

Question 1

The bid quote is the rate at which the dealer will sell foreign currency.

Answer 1

False

Question 2

Most companies find it easier to estimate the incremental cash flows for foreign projects than for domestic projects.

Answer 2

False

Question 3

Globalisation refers to the removal of barriers to free trade and the closer integration of national economies.

Answer 3

True

Question 4

To convert the project's future cash flows into another currency, we need to come up with projected or forecast exchange rates.

Question 5

When an Australian bank in Sydney gives a quote of £0.5089/$, it is a direct quote.

Question 6

The foreign exchange market is a group of international markets connected electronically where currencies are bought and sold in wholesale amounts.

Question 7

Tokyo is the largest foreign exchange trading centre.

Question 8

Cultural views shape business practices and people's attitudes toward business.

Question 9

English is the official business language, but not the world's social language.

Question 10

Integration of the financial system globally is a result of deregulation of foreign exchange markets, money and capital markets, and banking systems.

Question 11

European companies focus on maximising market share rather than shareholder wealth.

Question 12

Shareholder wealth maximisation is the accepted goal for companies in all countries around the world.

Question 13

Differences in legal systems and tax codes have no impact on the way companies operate in foreign countries.

Question 14

The production of goods and services has also become highly globalised.

Question 15

If the exchange rate is the price in foreign currency for a dollar, the quote is called direct quote.

Question 16

Japanese managers focus on maximising market share rather than shareholder wealth.

Question 17

A transnational company is a business company that operates in more than one country but is headquartered or based in its home country.

Question 18

The decision to accept international projects with a positive NPV increases the value of the company and is consistent with maximising shareholder wealth.

Question 19

Both China and the nations that formerly made up the Soviet Union are currently moving toward centrally planned economies.

Question 20

The European manager's goal is to earn as much wealth as possible for the company while considering the overall welfare of all stakeholders.

Question 21

Which one of the following statements about multinational companies is NOT true?

A) A multinational company is a business company that operates in more than one country but is headquartered or based in its home country.
B) Multinational companies are owned by domestic shareholders only.
C) Multinational companies may purchase raw materials from one country, obtain financing from a capital market in another country, and produce finished goods with labour and capital equipment from a third country.
D) All of the above

Question 22

Eurodollar and other Eurocurrency bonds have all characteristics identical to similar U.S corporate bonds.

Question 23

Factors that can make international business transactions unique include all EXCEPT:

A) Exchange rate risk, legal systems, and country risk.
B) Legal systems, cultural factors, and economic systems.
C) Exchange rate risk, country risk, and size of market.
D) Economic systems, cultural factors, and country risk

Question 24

The three economic benefits provided by the foreign exchange markets include:

A) A mechanism to transfer purchasing power from individuals who deal in one currency to people who deal in a different currency.
B) A way for companies to pass the risk associated with foreign exchange price fluctuations to professional risk-takers.
C) A channel for importers and exporters to acquire credit for international business transactions.
D) All of the above

Question 25

Which ONE of the following statements is true?

A) Equilibrium occurs at the price at which the quantity of the currency demanded exactly equals the quantity supplied.
B) Whatever causes U.S. residents to buy more or fewer foreign goods shifts the demand curve for the foreign currency.
C) Whatever causes foreigners to buy more or fewer U.S. goods shifts the supply curve for the foreign currency.
D) All of the above

Question 26

The bid quote represents the rate at which

A) the dealer will buy foreign currency from you.
B) the dealer will sell foreign currency to you.
C) you can buy the foreign currency from the dealer.
D) None of the above.

Question 27

If the foreign exchange rate is the price in foreign currency for a dollar, then the exchange rate quote is called

A) an American quote.
B) an indirect quote.
C) a direct quote.
D) a cross quote.

Question 28

The difference between the forward rate and the spot rate is called the

A) cross exchange rate.
B) forward premium or forward discount.
C) indirect quote.
D) None of the above.

Question 29

The ask quote represents the rate at which

A) the dealer will buy foreign currency from you.
B) the dealer will sell foreign currency to you.
C) you can sell the foreign currency to the dealer.
D) None of the above.

Question 30

The major participants in the foreign exchange markets are

A) multinational commercial banks, large investment banking companies, and domestic companies.
B) multinational commercial banks, local banks and domestic companies.
C) multinational commercial banks, large investment banking companies, and small currency boutiques that specialise in foreign exchange transactions.
D) None of the above

Question 31

Evidence of globalisation include

A) Consumers in many countries buy goods that are purchased from a number of countries, other than just their own.
B) Goods and services are produced around the world.
C) The financial system has also become highly integrated.
D) All of the above.

Question 32

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

Question 33

Which ONE of the following is an indirect quote from an Australian perspective?

A) £0.5125/$
B) $0.006900/¥
C) $1.5637/€
D) ¥115.23/€

Question 34

The three largest foreign exchange markets based on daily volume are

A) London, New York, and Tokyo.
B) New York, Tokyo, and Zurich.
C) London, Tokyo, and Zurich.
D) London, New York, and Singapore.

Question 35

A European quote is the same as

A) an American quote.
B) an indirect quote.
C) a direct quote.
D) a cross quote.

Question 36

Which ONE of the following statements about the goal of the company is true?

A) Shareholder value maximisation is the accepted goal for companies in India.
B) Companies in Germany focus on maximising corporate wealth.
C) The goal of the Japanese business manager is to increase the wealth and growth of the keiretsu.
D) All of the above

Question 37

Which ONE of the following statements about the goal of the company is true?

A) Corporate wealth maximisation is the accepted goal for companies in India.
B) Companies in Australia focus on maximising corporate wealth.
C) The goal of the Japanese business manager is to increase the wealth and growth of the keiretsu.
D) Private-sector companies in China focus on providing full employment in the economy.

Question 38

If a company is located in a country with a relatively unstable political environment, management will require a lower rate of return on capital projects.

Question 39

To convert the project's future cash flows into another currency, we need to use today's spot exchange rates.

Question 40

Long-term loans of a Eurocurrency made to multinational companies and governments of poor credit quality are called Eurocredits.

Question 41

Spot rate: Starling Company purchased some components from a Mexican manufacturer. They have to pay 110 million Mexican pesos for the goods today. The spot rate today is MP10.3540/$. What is the dollar cost of this payable? Round to the nearest dollar.

A) $110,000,000
B) $10,623,913
C) $11,110,235
D) $1,138,940,000

Question 42

Forward premium: The spot rate on the London market was £0.5434/$, while the 90-day forward rate was £0.5519/$. What is the annualised forward premium or discount on the U.S. dollar for the period? Round to one decimal place.

A) 1.6% premium
B) 6.2% premium
C) 6.2% discount
D) 1.6% discount

Question 43

Spot rate: If the spot rate is quoted as $0.009369/¥, what is the exchange rate in terms of yen per dollar?

A) ¥0.009369/$
B) ¥0.936900/$
C) ¥106.7350/$
D) ¥16.7350/$

Question 44

Forward rate: Celio Ltd sold equipment to a French company and will receive €1,249,425 in 30 days. If the company entered a forward contract to sell the euros at the 30-day forward rate of $1.5512/€, what is the dollar revenue received?

A) $1,249,425
B) $805,457
C) $1,938,108
D) $1,312,224

Question 45

Cross rate: Bartman Company observes that the Swiss franc (SF) is being quoted at $0.6164/SF, while the Swedish krona (SK) is quoted at $0.1981/SK. What is the SK/SF cross rate?

A) SK0.3214/SF
B) SK3.1116/SF
C) SK0.4183/SF
D) SK2.1467/SF

Question 46

Spot rate: Tantrix Ltd purchased its inventory from an Indian manufacturer at a cost of Rs.5,325,000. The dollar cost of this payable is $125,634.07 at today's spot rate. What is the spot rate today?

A) $4.2385/Rs.
B) $42.3850/Rs.
C) Rs.42.3850/$
D) Rs. 4.2385/$

Question 47

Forward premium: State Bank of India has offered a spot rate quote on Indian rupees (Rs) of Rs. 42.47/$. The Indian rupee is quoted at a 30-day forward premium of 7.65 per cent against the dollar. What is the 30-day forward quote?

A) Rs 43.5622/$
B) Rs 41.5687/$
C) Rs 45.1226/$
D) Rs 42.7404/$

Question 48

Spot rate: Venkat Ram purchased a pair of dress shoes in Italy for €131.25. If the spot exchange rate is $1.5621/€, what is the dollar cost of the shoes?

A) $205.03
B) $84.02
C) €131.25
D) €84.02

Question 49

Forward rate: Baljit Ltd purchased machinery from a Japanese company and will have to pay ¥278.45 million in 90 days. The bank quotes a forward rate of ¥105.46/$ to buy the required yen. What is the cost to Baljit in U.S. dollars?

A) $2,640,338
B) $2,784,500
C) $2,936,534
D) $2,714,300

Question 50

Cross rate: Xecor Pharma just received revenues of $2,372,300 in Australian dollars (A$). The only quotes management received are A$2.0651/£ and $1.8538/£. What is the U.S. dollar value of the company's revenues? Round to the nearest dollar.

A) $4,397,770
B) $4,899,037
C) $2,642,742
D) $9,081,834

Question 51

Forward premium: Bank of America quoted the 180-day forward rate on the Japanese yen at $0.009702/¥. The spot rate was quoted at $0.009466/¥. What is the forward premium or discount on the Japanese yen? Round off to the nearest per cent.

A) 7% premium
B) 7% discount
C) 5% premium
D) 5% discount

Question 52

Bid-ask spread: Banco Herrero wants to make a bid-ask spread of 0.55 per cent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP10.4192/$, what does the bid rate have to be?

A) MP10.3619/$
B) MP10.4192/$
C) MP10.4249/$
D) MP10.2165/$

Question 53

Forward rate: John Travers is planning a holiday to Thailand but is concerned that the U.S. dollar will decline in value before he makes his trip. His travel agent has planned a trip for him for a total cost of 41,250 Thai baht. John plans to purchase the bahts forward and is given a dollar estimate of $1,247.17 based on the 30-day forward quote. What is the forward rate?

A) THB41.2500/$
B) THB33.0785/$
C) $0.0242/THB
D) $1.2471/THB

Question 54

Bid-ask spread: A local bank has requested foreign exchange quotes for the Swedish krona from Citibank. Citibank quotes a bid rate of $0.1652/SK and an ask rate of $0.1667/SK. What is the bid-ask spread?

A) 1.2%
B) 2.1%
C) 0.9%
D) 0.65%

Question 55

Bid-ask spread: A foreign exchange dealer is willing to buy the New Zealand dollar (NZ$) at $0.7621/NZ$ and will sell it at a rate of $0.7714/NZ$. What is the bid-ask spread?

A) 0.2%
B) 2.1%
C) 0.9%
D) 1.2%

Question 56

Cross rate: Dresdner Bank has offered the following exchange rate quotes on Indian rupees (Rs): Rs.83.7612/£ and $1.8654/£. What is the cross rate between the Indian rupees and the U.S. dollar?

A) Rs. 44.9025/$
B) Rs. 49.9375/$
C) Rs. 51.2134/$
D) Rs. 36,7122/$

Question 57

Spot rate: Suppose a Tata Nano car is priced at Rs. 100,000 in New Delhi and $3,129 in New York. In which place is the car more expensive if the spot rate is $0.0242/Rs.?

A) In New Delhi
B) In New York
C) It is same in both places.
D) It cannot be determined.

Question 58

Spot rate: Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say that

A) the U.S. dollar is at a forward premium against the yen.
B) the yen is at a forward premium against the U.S. dollar.
C) the yen is at a forward discount against the U.S. dollar.
D) the dollar is at neither a premium nor a discount against the yen.

Question 59

Cross rate: Trident Company recently purchased machinery parts worth 23.5 million Mexican pesos (MP). Management needs to find out the U.S. dollar cost of the payables. It has access to two quotes for Canadian dollars (C$): C$1.0774/$ and C$0.0981/MP. What will it cost Trident to purchase 23.5 million Mexican pesos? Round to the nearest dollar.

A) $2,531,890
B) $2,305,350
C) $2,139,735
D) $1,987,325

Question 60

Spot rate: Given that the spot rate is $1.5136/€ and the 90-day forward quote is $1.4974/€, we can say that

A) the U.S. dollar is at a forward premium against the euro.
B) the U.S. dollar is at a forward discount against the euro.
C) the euro is at a forward premium against the U.S. dollar.
D) the dollar is at neither a premium nor a discount against the euro.

Question 61

Hedging: Kapona Industries has purchased equipment from a Korean company for a total cost of 11,500,000 Korean won. The company has to pay in 90 days. J. P. Morgan has given the company a 90-day forward quote of $0.0009791/won. Assume that on the day the payment is due, the spot rate is at $0.001004/ won. How much would Kapona save by hedging with a forward contract? Round to the nearest dollar.

A) $687
B) $338
C) $152
D) $286

Question 62

Hedging: Carrington Industries sold equipment to a Mexican company. Payment of 41,275,000 pesos will be due in 30 days. Carrington has the option of selling the pesos at a 30-day forward rate of $0.09739/peso. If it waits 30 days to sell the pesos, the expected spot rate is $0.09596/peso. How much additional dollar revenue will Carrington get by selling forward the pesos? Round to the nearest dollar.

A) $24,687
B) $83,838
C) $59,023
D) $31,278

Question 63

Describe the global debt markets.

Question 64

Hedging: Palermo Company sold equipment to a French company. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar.

A) $124,687
B) $118,418
C) $159,023
D) $131,278

Question 65

Hedging: Tamcon Industries has purchased equipment from a Brazilian company for a total cost of 1,272,500 Brazilian reals (BR). The company has to pay in 30 days. Citicorp has given the company a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar.

A) $24,687
B) $803,838
C) $779,152
D) $31,278

Question 66

The ways that a foreign government can affect the risk of a foreign project include:

A) Change tax laws in a way that adversely impacts the company.
B) Impose laws related to labour, wages, and prices that are more restrictive than those applicable for domestic companies.
C) Disallow any remittance of funds from the subsidiary to the parent company for either a limited period of time or the duration of the project.
D) All of the above.

Question 67

Long-term debt sold by a foreign company to investors in a foreign country and denominated in that country's currency is called a

A) Eurobond.
B) municipal bond.
C) foreign bond.
D) currency bond.

Question 68

Long-term debt instruments sold by companies to investors in countries other than the country in whose currency the bonds are denominated

A) Samurai bonds.
B) Eurobonds.
C) foreign bonds.
D) currency bonds.

Question 69

The Euromarkets are

A) vast, largely unregulated money and capital markets with major financial centres in Tokyo, Hong Kong, and Singapore.
B) vast, regulated money and capital markets with major financial centres in the United Kingdom.
C) vast, regulated money and capital markets with major financial centres in the euro zone.
D) None of the above.

Question 70

When performing capital budgeting analysis on international projects, managers

A) find it more difficult to estimate the incremental cash flows for foreign projects
B) have to deal with foreign exchange rate risk on international capital investments.
C) must incorporate a country risk premium when evaluating foreign business activities.
D) All of the above.

Question 71

The Eurocurrency market is the

A) medium-term portion of the Euromarket.
B) short-term portion of the Euromarket.
C) long-term portion of the Euromarket.
D) None of the above.

Question 72

Which ONE of the following statements about Eurocredits is true?

A) The international banking system gathers funds from businesses and governments in the Eurocurrency market and then allocates funds to banks that have the most profitable lending opportunities.
B) Eurocredits are denominated in all major Eurocurrencies, although the dollar is the overwhelming favourite.
C) Eurocredits are short- to medium-term loans made to multinational companies and governments of medium to high credit quality.
D) All of the above.

Question 73

Country risk should be incorporated into the international capital budgeting analysis by

A) adjusting the company's discount rate for the additional risk.
B) increasing cash flow estimates from the project.
C) doing nothing.
D) None of the above.

Question 74

Which one of the following statements about Eurobonds is NOT true?

A) Multinational companies can use Eurobonds to finance international or domestic projects.
B) Eurobonds are bearer bonds and do not have to be registered.
C) Eurobonds are bonds that have to be registered.
D) Eurobonds also pay interest annually.

Question 75

Loan pricing: Zylex Company's German unit is looking to borrow €4.5 million from Deutsche Bank. Deutsche Bank quotes a rate of three-month LIBOR plus 0.5 per cent for the 90-day loan. Currently, the three-month LIBOR is 4.175 per cent. If the exchange rate on the pay-off date is €0.8334/$, what is the dollar cost of the loan?

A) $63,107.45
B) $126,214.90
C) $39,143.76
D) $56,357.99

Question 76

How does the goal of the company vary across countries?

Question 77

The ways that a foreign government can adversely affect the risk of a foreign project include all EXCEPT:

A) Change tax laws in a way that adversely impacts the company.
B) Impose laws related to labour, wages, and prices that are more restrictive than those applicable for domestic companies.
C) Remove tariffs and quotas on any imports.
D) Disallow any remittance of funds from the subsidiary to the parent company for either a limited period of time or the duration of the project.

Question 78

What are the six factors that can cause international business transactions to differ from domestic deals?