Question 1

Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is fiscal policy that a country adopts.

Accepted Answer

While fiscal policy can have an impact on foreign exchange rates in the short term, a wide range of economic, political, and social factors can also influence exchange rates. Long-term changes in exchange rates are the result of complex and multifaceted factors such as changes in economic growth rates, inflation, trade patterns, and geopolitical developments.

Question 2

When more units of a foreign currency are required to buy one dollar, the currency is said to have appreciated with respect to the dollar.

Accepted Answer

When more units of a foreign currency are required to buy one dollar, it means that the foreign currency has weakened or depreciated with respect to the dollar.

Question 3

Both theory and empirical evidence indicate that the capital structures of MNCs are not different from those of purely domestic firms.

Accepted Answer

While there is some debate among researchers, many studies have found that MNCs do have different capital structures than purely domestic firms. This is due to a variety of factors, including differences in market access, sources of financing, and risk management strategies.

Question 4

Accounting exposure is the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

Accepted Answer

Accounting exposure is indeed the risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's financial statement accounts denominated in a given foreign currency.

Question 5

The spot exchange rate is the rate of exchange between two currencies at some specified future date.

Accepted Answer

The spot exchange rate is the rate of exchange between two currencies at the current moment, not at some specified future date. At a future date, we refer to the forward exchange rate.

Question 6

Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is a differing inflation rate between two countries.

Accepted Answer

According to the purchasing power parity theory, exchange rates should adjust to reflect differences in inflation rates between two countries in the long run. Higher inflation rate in one country relative to another will cause its currency to depreciate against the other currency. Therefore, differing inflation rates between two countries is the most important explanation for long-term changes in exchange rates.

Question 7

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

Accepted Answer

This is because high inflation erodes the purchasing power of a currency, making it less attractive to foreign investors and lowering demand for it on the global market.

Question 8

Which of the following is considered to be a major or hard currency?

Accepted Answer

The Japanese yen is considered a major currency and is one of the most traded currencies in the world. The other options, Algerian dinar, Barbadian dollar, and Mexican peso, are not considered major currencies.

Question 9

Macro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, or the adoption of new policies by the government of host country.

Accepted Answer

Macro political risk is a real and significant threat to foreign companies operating overseas, which can stem from events like changes in government administration or policies, revolutions or civil unrest, diplomatic conflicts between governments, and other destabilizing factors.

Question 10

The functional currency is the currency in which a business entity primarily generates and expends cash and in which its accounts are maintained.

Accepted Answer

This statement correctly defines the concept of functional currency.

Question 11

Both theory and empirical evidence indicate that the capital structures of MNCs differ from those of purely domestic firms.

Accepted Answer

Theory suggests that MNCs may have access to a wider range of financing options due to their global presence and diversified operations. Empirical evidence also shows that MNCs tend to have higher leverage ratios and use more long-term debt than domestic firms. Additionally, MNCs may use internal financing from their subsidiaries located in different countries, as well as currency hedging strategies.

Question 12

The forward exchange rate is the rate of exchange between two currencies on any given day.

Accepted Answer

The forward exchange rate refers to the exchange rate agreed upon today for a currency transaction that will take place at a future date, not the current day's exchange rate.

Question 13

National entry control systems are comprehensive rules, regulations, and immigration policies introduced by xenophobic host governments to regulate inflows of foreign workers.

Accepted Answer

National entry control systems are designed to regulate the entry and stay of foreigners in a country, focusing on immigration control and national security, rather than being inherently xenophobic.

Question 14

Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on a firm's value.

Accepted Answer

Economic exposure is indeed the risk that a company faces due to changes in foreign exchange rates, which can affect the value of its assets, liabilities, and profits. This type of exposure is different from transaction and translation exposure and is typically associated with long-term investments and cash flows in foreign currencies.

Question 15

Micro political risk is the risk faced by all foreign firms in a host country related to political change, revolution, and the adoption of new policies by the government of host country.

Accepted Answer

Micro political risk refers to the risk faced by a specific company or industry within a host country due to political actions or changes, rather than the broader, country-wide risks that affect all foreign firms, which is referred to as macro political risk.

Question 16

National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct investment from MNCs and at the same time extract more benefits from their presence.

Accepted Answer

National entry control systems refer to specific policies and regulations put in place by host governments to control and regulate foreign direct investment inflows from multinational corporations. These measures aim to maximize the benefits of foreign investment while minimizing its potential negative externalities. Therefore, option A is the correct answer.

Question 17

When fewer units of a foreign currency are required to buy one dollar, the currency is said to have ________.

Accepted Answer

Appreciation refers to an increase in the value of a currency relative to another currency. When fewer units of a foreign currency are needed to buy one dollar, this means that the foreign currency has increased in value relative to the dollar, and thus has appreciated with respect to the dollar.

Question 18

A U.S-based MNC has a subsidiary in China where the local currency is the Renminbi (RMB). The balance sheets and income statements of the subsidiary are presented in the table below. On December 31, 2014, the exchange rate was 8.27 RMB/US$. Assume the local currency figures in the statement below remain the same on December 31, 2015. Calculate the U.S. dollar translated figures for the two ending time periods assuming that between December 31, 2014 and December 31, 2015, the Chinese government revalues (appreciates) the RMB by 20 percent.
Translation of Income Statement  Translation of Balance Sheet

Accepted Answer

The answer of A U.S-based MNC has a subsidiary in...

Question 19

The three basic types of risks associated with international cash flows are business and financial risks, inflation and exchange rate risks, and political risks.

Accepted Answer

The statement is true. The three basic types of risks associated with international cash flows are business and financial risks, inflation and exchange rate risks, and political risks.

Question 20

Recent years have seen the emergence of a third path to political risk that encompasses "global" events such as terrorism, antiglobalization movements and protests, Internet-based risks, and concerns over poverty, AIDS, and the environment all affect various MNCs' operations worldwide.

Accepted Answer

This statement is true. In recent years, there has been increasing recognition of the need for multinational corporations (MNCs) to manage political risk beyond just host country risks and internal risks. The emergence of "global" events such as terrorism, antiglobalization movements and protests, Internet-based risks, and concerns over poverty, AIDS, and the environment, have all had impacts on MNC operations worldwide.

Quiz 19: International Managerial Finance