Question 1

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

Accepted Answer

The balance of payments is a record of all transactions made between entities in one country and the rest of the world over a period of time, but it is not a method for keeping the foreign exchange market in equilibrium.

Question 2

Political risk and labor unrest will tend to strengthen a country's currency.

Accepted Answer

Political risk and labor unrest can lead to a decrease in foreign investment and economic instability, which can weaken a country's currency.

Question 3

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

Accepted Answer

A bear market generally indicates lower investor confidence, which can lead to a decrease in demand for the country's currency, ultimately lowering its value.

Question 4

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

Accepted Answer

A money market hedge involves the use of borrowing or lending in the foreign currency to lock in a specific exchange rate. It does not involve trading on a futures exchange.

Question 5

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

Accepted Answer

When a bank issues a letter of credit, they are essentially guaranteeing payment to the exporter. The bank takes on the credit risk, not the exporter.

Question 6

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

Accepted Answer

The future rates of currency, or forward rates, are determined by the interest rate differential between two currencies, not necessarily by increasing uncertainty over time.

Question 7

Translation exposure occurs because of changes in foreign exchange rates.

Accepted Answer

Translation exposure is the risk of an organization's financial statements being affected by the movement of exchange rates. It arises from the translation of foreign currency assets, liabilities, and transactions of a subsidiary into the parent company's reporting currency. Fluctuations in exchange rates can lead to gains or losses in translation, which can impact a company's financial performance.

Question 8

Forward contracts tend to be created on organized exchanges like the International Money Market of the Chicago Mercantile Exchange.

Accepted Answer

Forward contracts are typically created through private agreements between two parties and are not traded on organized exchanges. However, exchange-traded futures contracts are similar in nature to forward contracts and are traded on organized exchanges like the Chicago Mercantile Exchange.

Question 9

A fronting loan disguises the identity of a parent multinational corporation that infuses money into a foreign subsidiary. This technique is intended to reduce the political risk of operating a subsidiary in a foreign country.

Accepted Answer

A fronting loan is a type of loan where a parent multinational corporation provides funding to a foreign subsidiary, but the identity of the parent company is disguised to minimize political risk. By using a fronting loan, the subsidiary may be able to avoid negative consequences of being associated with a foreign parent company during times of political turmoil or instability in the host country.

Question 10

Transaction exposure results in foreign exchange gains and losses.

Accepted Answer

Transaction exposure refers to the risk that currency exchange rates will fluctuate after a company has entered into a transaction denominated in a foreign currency, resulting in gains or losses when the transaction is settled. Therefore, transaction exposure does indeed result in foreign exchange gains and losses.

Question 11

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

Accepted Answer

The spot rate reflects the current exchange rate, not the expected future value of a currency. Future expectations are more closely related to the forward rate.

Question 12

Political risks include the possibility that a government may expropriate a firm's profits, or worse, repatriate all of the firm's assets.

Accepted Answer

Political risks can include the potential for a government to take actions such as expropriating a firm's profits or repatriating all of its assets.

Question 13

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

Accepted Answer

The answer of In the financing of a foreign affiliate,...

Question 14

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

Accepted Answer

Foreign exchange risk is the risk that the exchange rate between two currencies will change unfavorably before a transaction is completed, resulting in a financial loss. It is not the risk of being unable to exchange currencies.

Question 15

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

Accepted Answer

The answer of In a fronting loan arrangement, the intermediary...

Question 16

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

Accepted Answer

Transaction exposure can be hedged with currency futures contracts, as these contracts lock in a future exchange rate, reducing uncertainty and potential losses from adverse movements in exchange rates.

Question 17

In Germany, restrictions limiting labor layoffs have encouraged companies to reduce investment there. Thus, in the long run, these labor protection laws actually can be expected to result in higher unemployment in Germany.

Accepted Answer

The answer of In Germany, restrictions limiting labor layoffs have...

Question 18

The term balance of payments refers to the flow of economic transactions between the residents of one country and the residents of another.

Accepted Answer

The statement accurately defines the concept of balance of payments.

Question 19

According to the interest rate parity theory, interest rates along with exchange rates adjust until the foreign exchange market and the money market are in equilibrium.

Accepted Answer

According to the interest rate parity theory, interest rates in different countries will adjust, along with exchange rates, until the return on foreign and domestic investments are equal. This creates equilibrium in both the foreign exchange market and the money market.

Question 20

A firm that perhaps suffers 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.

Accepted Answer

Selling Japanese yen futures would allow the firm to lock in a future exchange rate, which could help offset any losses resulting from a decline in the value of the Japanese yen. However, there could still be other factors that could affect the firm's overall risk, and selling futures may not completely eliminate all risks.

Quiz 21: International Financial Management