Deck 16: Foreign-Exchange Risk, Forecasting, and International Investment

Question 1

is the spending of domestic firms for establishing foreign operating units.

A) Direct portfolio investment
B) Indirect foreign investment
C) Direct foreign investment
D) Taking a long position

Answer 1

C

Question 2

International investment is motivated by considerations.

A) risk and spending
B) imperialist
C) spending
D) risk and return

Answer 2

D

Question 3

Foreign exchange risk may be hedged and eliminated by

A) speeding collection of currencies expected to depreciate.
B) invoicing in the domestic currency.
C) the forward market.
D) All of the above.

Answer 3

D

Question 4

The discrepancy between the forward rate and the expected future spot rate due to the presence of a risk premium makes

A) the forward rate a biased predictor of the future spot rate.
B) the forward rate an unbiased predictor of the future spot rate.
C) the foreign exchange market inefficient.
D) Both A and C.

Question 5

An unbiased forward rate

A) is one that is correct on average.
B) implies that it is a good predictor.
C) implies no risk premium.
D) All of the above.

Question 6

If an investor prefers less risk to more risk, then he is

A) risk-averse.
B) a risk-lover.
C) a risk-taker.
D) a risk-predictor.

Question 7

In an efficient foreign exchange market, an unexpected increase in domestic money supply growth can lead to

A) an immediate appreciation of a currency.
B) an immediate depreciation of a currency.
C) an immediate decrease in direct foreign investment.
D) an immediate decrease in systematic risk in internal investments.

Question 8

The variance that can be eliminated through portfolio diversification is called the

A) diversification risk.
B) systematic risk.
C) covariance risk.
D) nonsystematic risk.

Question 9

Which one is not a concept of exchange risk exposure?

A) transaction exposure
B) transfer exposure
C) translation exposure
D) economic exposure

Question 10

Buying currency for future delivery implies that an investor is

A) taking a long position in the foreign exchange market.
B) going to get a foreign exchange risk premium.
C) taking a short position in the foreign exchange market.
D) a risk-lover.

Question 11

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

A) risk aversion.
B) portfolio risk.
C) induced risk.
D) the risk premium.

Question 12

Risk aversion implies that

A) people must be paid to take risk.
B) individuals with bad credit must pay a higher interest rate than those with good credit.
C) investors prefer less risk to more.
D) All of the above.

Question 13

The systematic risk

A) is specific to some investments.
B) can be eliminated with portfolio diversification.
C) is common to all investments and cannot, therefore, be eliminated through portfolio diversification.
D) is equal to the difference between the forward rate and the expected future spot rate.

Question 14

By diversifying and selecting different assets for a portfolio, we can

A) increase the variability of the portfolio.
B) increase the possibility of making direct foreign investments.
C) reduce the variability of the portfolio.
D) reduce the systematic risk arising from the investments we make.

Question 15

If the effective return differential between assets of two countries is zero, then there would be

A) a risk premium in the forward exchange market.
B) a short position in the foreign exchange market.
C) a systematic risk taken by international investors.
D) no risk premium in the forward exchange market.

Question 16

The possibility that exchange rate changes can affect future profitability and therefore the current value of the firm is indicative of

A) economic exposure.
B) translation exposure.
C) transaction exposure.
D) All of the above.

Question 17

The forward rate may serve as a predictor of

A) current spot rates.
B) the systematic risk on foreign investment.
C) expected future spot rates.
D) the nonsystematic risk on foreign investment.

Question 18

International capital flows may be due to

A) tax increases.
B) capital controls.
C) political or financial crisis.
D) All of the above.

Question 19

Taking a short position in the foreign exchange market implies

A) selling currency for future delivery.
B) buying currency for future delivery.
C) selling and buying currency today.
D) selling currency today.

Question 20

Direct investment may become an increasingly important source of finance for countries.

A) developing
B) developed
C) small
D) large

Question 21

The existence of a risk premium implies that the forward rate is equal to the expected future spot rate.

Question 22

Since profits are earned from foreign exchange speculation in the real world, it is also true that there are always sure profits.

Question 23

If I know what the spot rate will be in the future, I can make accurate forecasts and, therefore, enormous profits.

Question 24

What is "home bias" in international investments? What are some reasons that have been provided to explain its occurrence?

Question 25

Carry trade represents an arbitrage investment strategy with no risk.

Question 26

Comment on the following: "Portfolio diversification can eliminate all risk to the investor."

Question 27

International investors are only interested in the expected return on the investments they make.

Question 28

At the onset of the Asian financial crisis in 1997, many companies in Thailand found themselves in trouble because they had borrowed in dollars, and thus saw their liabilities increase as the Thai baht depreciated. This is an example of which kind of exposure?

A) translation exposure.
B) transaction exposure.
C) economic exposure.
D) business exposure.

Question 29

Forward rates are the best predictors of expected future spot rates because they are unbiased predictors.

Question 30

What are the main incentives for international capital flows and how might capital controls be imposed by governments to reduce capital flows?

Question 31

Carry trade is a common investment strategy that most commonly represents buying high interest rate currencies while at the same time selling low interest rate currencies.

Question 32

The effective return differential between assets of two countries is a function of risk and risk aversion.

Question 33

Some analysts have suggested that there is an inverse correlation between the daily value of the dollar and the Dow Jones Industrial Average. Such analysts claim that this inverse relation may be due to the fact that many U.S. companies receive revenues from their operations overseas, making the profits of their foreign subsidiaries more valuable when the dollar depreciates. If true, this relation would be an example of

A) economic exposure.
B) accounting exposure.
C) transaction exposure.
D) multinational exposure.

Question 34

Translation and accounting exposure are synonymous.

Question 35

The discrepancy between the forward rate and the expected future spot rate due to the presence of a risk premium implies that the foreign exchange market is not efficient.

Question 36

Risk aversion implies that a higher interest rate is required in order to induce creditors to make loans to bad credit risks.

Question 37

The causes of the recent Asian financial crisis are still being debated. However, there are certain elements that we can be safe to say that they play a role in the crisis. What are some of these causes of the crisis?

Question 38

This is another name given to translation exposure.

A) transaction exposure
B) accounting exposure
C) economic exposure
D) All of the above are names commonly used to refer to translation exposure

Question 39

In an efficient foreign exchange market, spot and forward exchange rates are slow to adjust to any new information or unexpected policy changes.

Question 40

Foreign exchange risk may be hedged or eliminated only by the forward market.

Question 41

The global financial crisis that began in 2008 has affected all countries in the world. This strong interconnection of the world's economies has implications for international diversification. Evaluate the following statement: The benefits of international diversification are more important now that the world is so interconnected.