Question 1

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

Accepted Answer

The threat of expropriation, which refers to the possibility of a government taking over a multinational firm's assets or operations without compensation, can make the firm more cautious about investing in certain countries and may also encourage them to minimize inventory holdings to reduce the value of their assets in the country. This can help the multinational firm to minimize losses if an expropriation does occur.

Question 2

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

Accepted Answer

This is true. A currency cross rate involves determining the exchange rate between two currencies by using a third currency as a base. For example, if you want to know the exchange rate between the euro and the yen, but you only have the exchange rate for the euro and the dollar and the exchange rate for the yen and the dollar, you can calculate the cross rate by using the dollar as the base currency.

Question 3

Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Accepted Answer

Legal and economic differences among countries can pose significant problems for multinational corporations when coordinating and controlling worldwide operations of subsidiaries. These differences may include differences in laws and regulations, accounting standards, tax systems, currencies, and cultural norms, which can affect the way companies operate and their profitability. Multinational corporations need to carefully navigate these differences and adapt their strategies and operations to local conditions to be successful.

Question 4

A foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Accepted Answer

This statement is known as the international Fisher effect and is based on the idea that higher inflation in a country erodes the purchasing power of its currency. As a result, the currency is expected to depreciate relative to a currency with lower inflation, such as the U.S. dollar.

Question 5

When the value of the U.S.dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Accepted Answer

When the value of the U.S. dollar appreciates, it means that it is worth more relative to another country's currency. As a result, we can purchase more units of the foreign currency with a single dollar.

Question 6

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S.corporations.

Accepted Answer

LIBOR is an average of interest rates offered by London banks to other London banks and other large corporations, not necessarily smaller U.S. corporations.

Question 7

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Accepted Answer

Most major industrialized nations, including the United States, currently use floating exchange rates. These rates are determined by market demand and supply, rather than being fixed to a specific value or currency.

Question 8

Multinational financial management requires that financial analysts consider the effects of changing currency values.

Accepted Answer

Multinational financial management involves managing financial activities across different countries with different currencies. Thus, financial analysts must consider and analyze the effects of changing currency values on investment decisions, cash flows, and exchange rates.

Question 9

Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.

Accepted Answer

Working capital management for multinational firms is more complex than it is for large domestic firms due to a variety of factors such as varying currencies, tax regulations, and local market conditions. While communications technology and standardization can help streamline processes, there are still unique challenges that multinationals face in managing their working capital.

Question 10

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

Accepted Answer

A Eurodollar is a U.S. dollar deposited in a bank outside the United States, typically in Europe or Asia.

Question 11

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Accepted Answer

Forward currency contracts allow individuals and corporations to lock in an exchange rate for a future date, which is used to hedge against exchange rate fluctuations. However, the strategy does not necessarily involve simultaneously selling the currency expected to appreciate and buying the currency expected to depreciate. Instead, it involves agreeing to exchange currencies at a future date at a predetermined rate, which could be for either buying or selling a currency based on the hedging needs.

Question 12

If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S.dollar.

Accepted Answer

A deficit trade balance means the U.S. is importing more from China than it is exporting to China, which typically leads to a stronger Chinese yuan relative to the U.S. dollar, as demand for yuan increases to pay for Chinese goods.

Question 13

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Accepted Answer

Political risk can be explicitly addressed in multinational corporate financial analysis through tools such as country risk analysis, political risk insurance, and contingency planning. Ignoring political risk can lead to significant financial losses for multinational corporations.

Question 14

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

Multinational firms have to consider exchange rate fluctuations which increase the risk associated with credit policy. Additionally, creditworthiness of foreign customers may not be as well-established as domestic customers, leading to uncertainty and further risk.

Question 15

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

Exchange rates can affect the value of inventory, especially if it is stored in a foreign country or if the raw materials are purchased from abroad. If the value of the domestic currency decreases relative to the foreign currency, the value of the company's inventory increases in domestic currency terms, and vice versa. This can impact the multinational firm's inventory policy, influencing decisions regarding where to store inventory and how much to produce or purchase at a given time.

Question 16

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

Accepted Answer

When the forward rate is higher than the spot rate, it indicates that the foreign currency is expected to depreciate against the dollar, hence it is selling at a discount.

Question 17

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct or indirect quotations, depending on the convention used by the particular country or financial institution. Direct quotations express the domestic currency in terms of a foreign currency, while indirect quotations express the foreign currency in terms of the domestic currency.

Question 18

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

Accepted Answer

When a currency is selling at a premium in the forward market, it means that the forward rate is higher than the spot rate, indicating that the foreign currency is more expensive in the future compared to the current market price. This means that a dollar will buy fewer units of the foreign currency in the future, hence the currency is said to be selling at a premium to the spot rate.

Question 19

Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

Accepted Answer

Exchange rate risk is a real risk faced by multinational companies operating in different countries. Fluctuations in exchange rates can lead to significant differences in the actual value of cash flows from foreign projects, which can potentially hurt the profitability and viability of those projects. As such, companies must actively manage exchange rate risk through a variety of tools like hedging, diversification, or adjusting their pricing strategies.

Question 20

The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.

Accepted Answer

The Eurodollar market is actually a short-term market, with most loans and deposits having maturities of less than one year.

Quiz 17: Multinational financial management