International Financial Management Multiple Choice Questions
1. Recently, the UK experienced an annual balance of trade representing a __________.
A. large surplus (exceeding £100 billion)
B. level of zero
C. small surplus
D. deficit
Answer: D. deficit
2. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.
A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer: B. downward
3. The North American Free Trade Agreement (NAFTA) increased restrictions on:
A. trade between Canada and Mexico.
B. trade between Canada and the U.S.
C. direct foreign investment in Mexico by U.S. firms.
D. none of the above.
Answer: D. none of the above.
4. The primary component of the current account is the:
A. balance of trade.
B. balance of capital market flows.
C. balance of money market flows.
D. unilateral transfers.
Answer: A. balance of trade.
5. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
A. increased trade restrictions outside of North America.
B. lower trade restrictions around the world.
C. uniform environmental standards around the wor
Answer: B. lower trade restrictions around the world.
6. ______________ is (are) income received by investors on foreign investments infinancial assets (securities).
A. Portfolio income
B. Unilateral transfers
C. Direct foreign income
D. Factor income
Answer: D. Factor income
7. Based on the text, it should be obvious that markets are__________ in reality, and consequently, monopolistic advantages _________ be exploited.
A. Perfect; may possibly
B. Perfect; cannot
C. Imperfect; may possibly
D. Imperfect; cannot
Answer: C. Imperfect; may possibly
8. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be __________. A firm would benefit __________ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.
A. high and positive; more
B. high and positive; less
C. close to zero; more
D. close to zero; less
Answer: C. close to zero; more
9. Which of the following is a reason to consider international business?
A. economies of scale.
B. exploit monopolistic advantages.
C. diversification.
D. all of the above
Answer: D. all of the above
10. Assume a U.S. firm initiates direct foreign investment in the U.K.. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should _______. The parent may request that the subsidiary _______ in order to benefit from the expectation about the pound.
A. increase; postpone remitting earnings until the pound strengthens
B. decrease; postpone remitting earnings until the pound strengthens
C. decrease; remit earnings immediately before the pound strengthens
D. increase; remit earnings immediately before the pound strengthens
Answer: A. increase; postpone remitting earnings until the pound strengthens
11. A country with high unemployment could best increase its employment by:
A. encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
B. encouraging foreign firms to establish licensing arrangements for products local firms produce.
C. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
D. none of the above would reduce employment.
Answer: C. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
12. Which of the following is not true regarding host government attitudes towards foreign direct investment (FDI)?
A. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
B. Host governments generally perceive FDI as a remedy to eliminate a country’s political problems.
C. The ability of a host government to attract FDI is dependent on the country’s markets and resources.
D. Some types of FDI will be more attractive to some governments than to others.
Answer: B. Host governments generally perceive FDI as a remedy to eliminate a country’s political problems.
13. When a firm perceives that a foreign currency is ________, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively _______.
A. overvalued; high
B. overvalued; low
C. undervalued; high
D. undervalued; low
Answer: D. undervalued; low
14. To enter markets where superior profits are possible, an MNC should:
A. acquire a competitor that has controlled its local market.
B. establish a subsidiary or acquire a competitor in a new market.
C. establish a subsidiary in a market where tougher trade restriction will adversely affect the firm’s export volume.
D. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.
Answer: A. acquire a competitor that has controlled its local market.
15. When economic conditions of two countries are ________, then a firm would _______ its risk by operating in both countries instead of concentrating just in one.
A. highly correlated; reduce
B. not highly correlated; reduce
C. not highly correlated; not reduce
D. none of the above
Answer: C. not highly correlated; not reduce
16. Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:
A. accounts receivable financing.
B. consignment.
C. factoring.
D. a letter of credit.
Answer: C. factoring.
17. Consider an exporter that is willing to send goods to the importer without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported goods. This reflects:
A. accounts receivable financing.
B. forfaiting.
C. factoring.
D. a letter of credit.
Answer: A. accounts receivable financing.
18. A ________ provides a summary of freight charges and conveys title to the merchandise.
A. letter of credit
B. banker’s acceptance
C. bill of lading
D. bill of exchange
Answer: C. bill of lading
19. With _______, the exporter ships the goods to the importer while still retaining actualtitle to the merchandise.
A. a letter of credit arrangement
B. an open account arrangement
C. a draft arrangement
D. a consignment arrangement
Answer: D. a consignment arrangement
20. A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:
A. banker’s acceptance.
B. time draft.
C. letter of credit.
D. sight draft.
Answer: D. sight draft.
21. Countertrade represents foreign trade:
A. restrictions imposed by the government on imports from another country.
B. restrictions imposed by the government on exports sent from the country.
C. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
D. financing provided to an exporter in exchange for goods provided to the creditor by the exporter.
Answer: C. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
22. Which of the following is not a payment method used for international trade?
A. consignment.
B. open account.
C. factoring.
D. draft.
Answer: C. factoring.
23. Which of the following is not true regarding letters of credit?
A. They are issued by banks on behalf of the importer promising to pay the exporter.
B. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
C. They guarantee that the goods shipped are the goods purchas
Answer: C. They guarantee that the goods shipped are the goods purchas
24. A banker’s acceptance is a draft drawn on and accepted by a(n) __________.
A. bank
B. importer
C. exporter
D. none of the above
Answer: A. bank
25. A(n) ___________ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.
A. draft
B. bill of lading
C. trade acceptance
D. letter of credit
Answer: A. draft
26. In balance of payments accounting, a credit entry for the home country is
A. an international transaction in which foreigners make payments to residents of the home country
B. one in which residents of the home country make payments for foreigners
C. one which results from an import of goods into the home country
D. one which results from an outflow of capital from the home country to a foreign country
Answer: A. an international transaction in which foreigners make payments to residents of the home country
27. If the value of exports for a country is $35,500,000 and the value of imports is $35,000,000, the balance of trade can be described as
A. in surplus but unfavorable
B. showing a gain in real goods but in deficit
C. in deficit and favorable
D. in surplus, favorable and +$500,000
Answer: D. in surplus, favorable and +$500,000
28. All of the following statements are explanations of the reason for short-term capital transfers from Country X to Country Y EXCEPT
A. Political instability in Country X
B. Lower interest rates in Country X
C. Lower interest rates in Country Y
D. Country X has made it known that it is considering devaluation of its currency
Answer: C. Lower interest rates in Country Y
29. Multinational firms face exposure to many different types of international risk. Which of the following is not a type of exposure?
A. diversifiable risk
B. political risk
C. foreign economies
D. exchange rate movements
Answer: C. foreign economies
30. A firms expects to receive $20,000 from domestic operations and 20,000 British pounds (£) from a business in England. If the pound’s value is $1.25, the expected total dollar cash flows are:
A. $40,000
B. $36,000
C. $45,000
D. $20,000
Answer: C. $45,000
31. When a country realizes a deficit on its current account:
A. Its net foreign investment position becomes positive
B. It becomes a net demander of funds from other countries
C. It realizes an excess of imports over exports on goods and services
D. It becomes a net supplier of funds to other countries
Answer: B. It becomes a net demander of funds from other countries
32. Reducing a current account deficit requires a country to:
A. Increase private saving relative to investment
B. Increase private consumption relative to saving
C. Increase private investment relative to consumption
D. Increase private investment relative to saving
Answer: A. Increase private saving relative to investment
33. Reducing a current account deficit requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer: D. Decrease the government’s deficit and decrease private investment relative to saving
34. Reducing a current account surplus requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit and increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer: A. Increase the government’s deficit and increase private investment relative to saving
35. Concerning a country’s business cycle, rapid growth of production and employment is commonly associated with:
A. Large or growing trade deficits and current account deficits
B. Large or growing trade deficits and current account surpluses
C. Small or shrinking trade deficits and current account deficits
D. Small or shrinking trade deficits and current account surpluses
Answer: A. Large or growing trade deficits and current account deficits
36. The burden of a current account deficit would be the least if a nation uses what it borrowsto finance:
A. Unemployment compensation benefits
B. Social Security benefits
C. Expenditures on food and recreation
D. Investment on plant and equipment
Answer: D. Investment on plant and equipment
37. On the balance-of-payments statements, merchandise imports are classified in the:
A. Current account
B. Capital account
C. Unilateral transfer account
D. Official settlements account
Answer: A. Current account
38. The balance of international indebtedness is a record of a country’s international:
A. Investment position over a period of time
B. Investment position at a fixed point in time
C. Trade position over a period of time
D. Trade position at a fixed point in time
Answer: B. Investment position at a fixed point in time
39. Which of the following exchange rate policies uses a target exchange rate, but allows the target to change?
A. fixed exchange rate
B. flexible exchange rate
C. crawling peg
D. moving target
Answer: C. crawling peg
40. A firm that buys foreign exchange in order to take advantage of higher foreign interestrates is
A. speculating.
B. demonstrating purchasing power parity.
C. engaging in interest rate arbitrage.
D. responding to fluctuations in the business cycle.
Answer: B. demonstrating purchasing power parity.
41. When an individual or firm in a particular country requests that a bank sell foreign exchange, the bank will probably
A. call a foreign bank and arrange a purchase.
B. call the central bank and arrange a purchase.
C. call another bank customer with foreign exchange holdings.
D. call another domestic bank and arrange a purchase.
Answer: A. call a foreign bank and arrange a purchase.
42. In order to protect against foreign exchange risk, firms can use
A. the spot market for foreign exchange.
B. interest rate arbitrage.
C. purchasing power parity.
D. the forward market for foreign exchange.
Answer: B. interest rate arbitrage.
43. Covered interest arbitrage involves both
A. the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B. the purchase of a domestic asset and a spot contract in the market for foreign exchange.
C. the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.
D. the sale of domestic stocks and the purchase of foreign bonds.
Answer: D. the sale of domestic stocks and the purchase of foreign bonds.
44. All else equal and under a system of floating exchange rates, if a country enters a periodof exceptionally strong growth,
A. the pressure on its currency is to revalue.
B. the pressure on its currency is to devalue.
C. the pressure on its currency is to depreciate.
D. the pressure on its currency is to appreciate.
Answer: A. the pressure on its currency is to revalue.
45. All else equal, if Euro Area raises its interest rates,
A. the dollar depreciates.
B. the U.S. demand for euros increases.
C. the Euro Area supply of euros increases.
D. Both A and B.
Answer: B. the U.S. demand for euros increases.
46. An Austrian firm that buys foreign exchange because its managers expect the euro todepreciate is
A. increasing the supply of foreign exchange.
B. increasing the demand for foreign exchange.
C. speculating.
D. Both A and B.
Answer: A. increasing the supply of foreign exchange.
47. Suppose the exchange rates between the United States and Euro Area are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Euro Area rates of inflation would
A. have no effect on nominal exchange rates.
B. be completely offset by changes in the real exchange rate.
C. be completely offset by changes in the nominal exchange rate.
D. violate the conditions for the law of one price.
Answer: D. violate the conditions for the law of one price.
48. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.
A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer: B. downward
49. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
A. increased trade restrictions outside of North America.
B. lower trade restrictions around the world.
C. uniform environmental standards around the wor
Answer: D.
50. The World Bank’s Multilateral Investment Guarantee Agency (MIGA):
A. offers various forms of export insurance.
B. offers various forms of import insurance.
C. offers various forms of exchange rate risk insurance.
D. provides loans to developing countries.
Answer: A. offers various forms of export insurance.
51. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed within narrow boundaries.
B. floating, but subject to central bank intervention.
C. floating, and not subject to central bank intervention.
D. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.
Answer: C. floating, and not subject to central bank intervention.
52. The currency of country X is pegged to the currency of country Y. Assume that county Y’s currency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.
A. more; more
B. less; less
C. more; less
D. less; more
Answer: B. less; less
53. Which of the following would likely have the least direct influence on a country’s current account?
A. inflation.
B. national income.
C. exchange rates.
D. tariffs.
Answer: A. inflation.
54. Over time, international trade (exports plus imports) as a percentage of GDP has:
A. increased for most major countries.
B. decreased for most major countries.
C. stayed about constant for most major countries.
D. increased for about half the major countries and decreased for the others.
Answer: D. increased for about half the major countries and decreased for the others.
55. Major functions of ‘IMF’ are
A. Oversea’s arrangements of fixed exchange rate
B. providing short term capital
C. providing leadership on health matters
D. both a and b
Answer: B. providing short term capital
56. International Monetary Fund is classified as
A. intergovernmental organization
B. international organization
C. interregional organization
D. One state organization
Answer: C. interregional organization
57. International Monetary Fund formal existence came into being in
A. 12 May, 1945
B. 27 July, 1945
C. 27 December, 1945
D. 27 September, 1945
Answer: A. 12 May, 1945
58. International Monetary Fund is headquartered in
A. Washington, United States
B. New York City, United States
C. Geneva, Switzerland
D. Avenue Du Mont Blanc, Switzerland
Answer: B. New York City, United States
59. How does the IMF meet its primary objective?
A. By promoting free international trade
B. By overseeing the balance of payments, acting as a forum of world negotiation and regulating world exchange rates
C. By acting as an arbitrator for the dispute settlement of world trade matters
D. By aligning its primary objective with the monetary objectives of national governments
Answer: A. By promoting free international trade
60. A eurocurrency is:
A. a bank deposit held in a country that does not issue that currency in which the deposit is denominated.
B. the currency of European Economic and Monetary Union – called the ‘euro’ for short.
C. a bank deposit in a non-European currency held in Europe.
D. a bank deposit in a European currency held outside of Europe. the currency of the European Union.
Answer: C. a bank deposit in a non-European currency held in Europe.
61. The eurocurrency market did not develop until the late 1950s because:
A. the countries of the Soviet bloc did not earn dollars in foreign trade until 1958.
B. European currencies were only convertible for non-residents before 1958.
C. the major European economies had not recovered sufficiently from the effects of World War II.
D. US banks were not permitted to open branches outside the USA until 1958.
Answer: B. European currencies were only convertible for non-residents before 1958.
Unit 2
62. A primary result of the Bretton Woods Agreement was:
A. the establishment of the European Monetary System (EMS).
B. establishing specific rules for when tariffs and quotas could be imposed by governments.
C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
D. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).
Answer: C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
63. Assume that a bank’s bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Itsbid-ask percentage spread is:
A. 4.00%.
B. about 3.85%.
C. 4.26%.
D. about 4.17%.
Answer: C. 4.26%.
64. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:
A. about .3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about .3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer: B. about 2.36 Canadian dollars.
65. LIBOR is:
A. the interest rate commonly charged for loans between banks.
B. the average inflation rate in European countries.
C. the maximum loan rate ceiling on loans in the international money market.
D. the maximum deposit rate ceiling on deposits in the international money market.
Answer: A. the interest rate commonly charged for loans between banks.
66. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed within narrow boundaries.
B. floating, but subject to central bank intervention.
C. floating, and not subject to central bank intervention.
D. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.
Answer: A. fixed within narrow boundaries.
67. Futures contracts are typically _______; forward contracts are typically _______.
A. sold on an exchange; sold on an exchange
B. offered by commercial banks; sold on an exchange
C. sold on an exchange; offered by commercial banks
D. offered by commercial banks; offered by commercial banks
Answer: C. sold on an exchange; offered by commercial banks
68. When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:
A. closing prices in the U.S. during the previous day.
B. closing prices in Canada during the previous day.
C. prevailing prices in locations where the foreign exchange markets have been open.
D. officially set by central banks before the U.S. market opens.
Answer: C. prevailing prices in locations where the foreign exchange markets have been open.
69. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be _____.
A. $13.64
B. $15.00
C. $16.50
D. 16.50 euros
Answer: C. $16.50
70. The value of the Australian dollar (A$) today is £0.41. Yesterday, the value of the Australian dollar was £0.38. The Australian dollar by _______%.
A. depreciated; 7.90
B. appreciated; 7.90
C. depreciated; 7.30
D. appreciated; 7.30
Answer: C. depreciated; 7.30
71. An increase in UK interest rates relative to euro interest rates is likely to ________the UK demand for euros and _________ the supply of euros for sale.
A. reduce; increase
B. increase; reduce
C. reduce; reduce
D. increase; increase
Answer: A. reduce; increase
72. Assume the following information regarding UK and European annualized interest rates: Currency Lending Rate Borrowing Rate UK pound (£) 6.73% 7.20% Euro (€) 6.80% 7.28% Milly Bank can borrow either £20 million or €20 million. The current spot rate of the euro is £0.75. Furthermore, Milly Bank expects the spot rate of the euro to be £0.76 in 90 days. What is Milly Bank’s pound profit from speculating if the spot rate of the euro is indeed £0.76 in 90 days?
A. £251,200
B. £251,386
C. £541,324
D. £561,813
Answer: A. £251,200
73. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 perpound:
A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer: D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
74. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:
A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer: A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
75. Any event that reduces the euro area demand for Japanese yen should result in a(n) _______ in the value of the Japanese yen with respect to _______, other things being equal.
A. increase; euro
B. increase; noneuro currencies
C. decrease; noneuro currencies
D. decrease; euro
Answer: D. decrease; euro
76. News of a potential surge in U.S. inflation and zero Chilean inflation places _______ pressure on the value of the Chilean peso. The pressure will occur _______.
A. upward; only after the U.S. inflation surges
B. downward; only after the U.S. inflation surges
C. upward; immediately
D. downward; immediately
Answer: C. upward; immediately
77. If a country experiences high inflation relative to the UK, its exports to the UK should _______________, its imports should ___________, and there is __________ pressure on its currency’s equilibrium value.
A. decrease; increase; upward
B. decrease; decrease; upward
C. increase; decrease; downward
D. decrease; increase; downward
Answer: C. increase; decrease; downward
78. To force the value of the dollar to appreciate against the pound, the Federal Reserve should:
A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
B. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
C. sell dollars for pounds in the foreign exchange market and the Bank of England should not intervene.
D. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
Answer: A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
79. The currency of country X is pegged to the currency of country Y. Assume that county Y’scurrency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.
A. more; more
B. more; less
C. less; less
D. less; more
Answer: C. less; less
80. The Bank of England may use a stimulative monetary policy with least concern aboutcausing inflation if the pound’s value is expected to:
A. remain stable.
B. strengthen.
C. weaken.
D. none of the above will have an impact on inflation.
Answer: B. strengthen.
81. The exchange rate mechanism (ERM) crisis in 1992 represents the __________ in German interest rates that caused other European interest rates to __________, and resulted in less aggregate spending.
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Answer: A. increase; increase
82. As foreign exchange activity has grown:
A. central bank intervention has become more effective.
B. central bank intervention has become more frequent.
C. central bank intervention has become less effective.
D. none of the above
Answer: C. central bank intervention has become less effective.
83. Which of the following are examples of currency controls?
A. import restrictions.
B. prohibition of remittance of funds.
C. ceilings on granting credit to foreign firms.
D. all of the above
Answer: D. all of the above
84. Due to _______, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
A. forward realignment arbitrage
B. covered interest arbitrage
C. triangular arbitrage
D. locational arbitrage
Answer: C. triangular arbitrage
85. In which case will locational arbitrage most likely be feasible?
A. One bank’s ask price for a currency is greater than another bank’s bid price for the currency.
B. One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
C. One bank’s ask price for a currency is less than another bank’s ask price for the currency.
D. One bank’s bid price for a currency is less than another bank’s bid price for the currency.
Answer: B. One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
86. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A. U.S. investors could possibly benefit from covered interest arbitrage.
B. British investors could possibly benefit from covered interest arbitrage.
C. neither U.S. nor British investors could benefit from covered interest arbitrage.
D. A and B
Answer: A. U.S. investors could possibly benefit from covered interest arbitrage.
87. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:
A. larger will be the forward discount of the foreign currency.
B. larger will be the forward premium of the foreign currency.
C. smaller will be the forward premium of the foreign currency.
D. smaller will be the forward discount of the foreign currency.
Answer: A. larger will be the forward discount of the foreign currency.
88. Assume the bid rate of a Singapore dollar is £0.20 while the ask rate is £0.21 at Bank X. Assume the bid rate of a Singapore dollar is £0.22 while the ask rate is £0.23 at Bank Z. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £11,764.
B. £47,619.
C. £36,585.
D. £48,710.
Answer: D. £48,710.
89. Assume the U.S. dollar is worth £0.55, and the Canadian dollar is worth £0.47. What is the value of the Canadian dollar in U.S. dollars to the nearest cent?
A. 1.54.
B. 0.42.
C. 0.15
D. 0.85
Answer: D. 0.85
90. Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0.45 at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the ask rate is £0.41 at Bank Y. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £24,340
B. £125,000
C. £150,000
D. £12,550
Answer: A. £24,340
91. Assume the bid rate of an Australian dollar is £0.40 while the ask rate is £0.42 at Bank Q. Assume the bid rate of an Australian dollar is £0.415 while the ask rate is £0.419 at Bank V. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £10,003
B. £12,063
C. £14,441
D. £0
Answer: D. £0
92. Arbitrageurs in foreign exchange markets:
A. take advantage of the small inconsistencies that develop between markets.
B. attempt to make profits by outguessing the market.
C. make their profits through the spread between bid and offer rates of exchange.
D. need foreign exchange in order to buy foreign goods.
Answer: A. take advantage of the small inconsistencies that develop between markets.
93. Covered interest rate parity occurs as the result of:
A. the actions of market-makers.
B. purchasing power parity
C. interest rate arbitrage.
D. stabilising speculation.
Answer: C. interest rate arbitrage.
94. Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.
A. The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.
B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
C. The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.
D. The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
Answer: B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
95. Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Inflationary expectations are higher in the UK than in the eurozone.
A. British markets are offshore from mainland Europe.
B. Unemployment is higher in the eurozone than in the UK.
C. Bond prices are lower in the UK than in the eurozone.
D. The euro is a weaker currency than sterling.
Answer: A. British markets are offshore from mainland Europe.
96. The euro is:
A. a currency, the value of which is determined by demand and supply.
B. the currency of EU member countries.
C. a weighted average of the currencies of EU member countries.
D. a currency that is only traded offshore.
Answer: A. a currency, the value of which is determined by demand and supply.
97. Overshooting models of the exchange rate are an attempt to explain:
A. why purchasing power parity plays no role in determining the value of a currency.
B. why exchange rates are so volatile.
C. why the foreign exchange market is never in equilibrium.
D. why forward rates of exchange are not good predictors of future spot rates of exchange.
Answer: B. why exchange rates are so volatile.
98. Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the
A. U.S. dollar depreciates by 2 percent a year.
B. U.S. dollar appreciates by 2 percent a year.
C. U.K. pound depreciates by 2 percent a year.
D. None of the above answers is correct because interest rate parity requires that the interest
Answer: A. U.S. dollar depreciates by 2 percent a year.
99. When the value of one currency falls relative to another currency, the exchange rate forthe first currency has
A. revalued.
B. depreciated.
C. appreciat
Answer: B. depreciated.
100. Under a gold standard, countries should
A. keep the supply of their domestic money constant.
B. keep the supply of their domestic money fixed in proportion to their gold holdings.
C. keep the supply of foreign exchange less than their domestic money supply.
D. restrict the demand for foreign goods.
Answer: C. keep the supply of foreign exchange less than their domestic money supply.
101. Under a fixed exchange standard, if the domestic demand for foreign exchange increases
A. the central monetary authority must meet the demand out of its reserves.
B. the central monetary authority must increase the supply of domestic money.
C. the fixed exchange standard will breakdown.
D. inflation will increase.
Answer: B. the central monetary authority must increase the supply of domestic money.
102. The Bretton Woods exchange rate system was an example of a
A. target zone.
B. managed float.
C. pure gold standa
Answer: D.
103. The biggest disadvantage of a fixed exchange rate is the
A. increased probability of high inflation.
B. tradeoff between supporting the exchange rate and adjusting the trade balance.
C. tradeoff between supporting the exchange rate and maintaining full employment.
D. increased probability of a trade deficit.
Answer: A. increased probability of high inflation.
104. The effect of a depreciation of the domestic currency on the trade balance is likely to
A. increase it in the short and long runs.
B. decrease it in the short run and increase it in the long run.
C. decrease it in the short and long runs.
D. increase it in the short run and decrease it in the long run.
Answer: B. decrease it in the short run and increase it in the long run.
105. Which of the following institutions is the most important participant in foreign currency markets?
A. A retail customer
B. A commercial bank
C. A foreign exchange broker
D. A central bank
Answer: D. A central bank
106. An increase in the U.S. demand for the euro
A. causes a rise in the dollar exchange rate.
B. causes the euro to appreciate.
C. causes the dollar to depreciate.
D. causes Euro Area goods to be relatively more expensive.
Answer: A. causes a rise in the dollar exchange rate.
107. Which of the following would NOT be a cause for an increased American demand for the euros?
A. The United States having lower interest rates than the Euro Area
B. Increased American demand for Euro Area goods
C. The expectation by speculators that the value of the euro is edging up
D. More economic expansion in the United States
Answer: B. Increased American demand for Euro Area goods
108. Which of the following is NOT one of the determinants of the gains of adopting a singlecurrency?
A. A well-synchronized business cycle involving all member countries
B. The possibility of factors of production to freely move across borders
C. The willingness and ability of member countries to design policies to address regional imbalances that may develop
D. Widening the common market by allowing other countries to join
Answer: A. A well-synchronized business cycle involving all member countries
109. If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.
A. True
B. False
C. all
D. none
Answer: A. True
110. Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
A. fundamental forecasting.
B. technical forecasting.
C. market-based forecasting.
D. mixed forecasting.
Answer: B. technical forecasting.
111. If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:
A. underestimated the future exchange rates over time.
B. overestimated the future exchange rates over time.
C. forecasted future exchange rates accurately.
D. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
Answer: B. overestimated the future exchange rates over time.
112. Which of the following is true according to the text?
A. Forecasts in recent years have been very accurate.
B. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
C. Forecasting errors are smaller when focused on longer term periods.
D. None of the above.
Answer: D. None of the above.
113. Which of the following is not a forecasting technique mentioned in your text?
A. accounting-based forecasting.
B. fundamental forecasting.
C. technical forecasting.
D. market-based forecasting.
Answer: A. accounting-based forecasting.
114. Which of the following is not a method of forecasting exchange rate volatility?
A. using the absolute forecast error as a percentage of the realized value.
B. using the volatility of historical exchange rate movements as a forecast for the future.
C. using a time series of volatility patterns in previous periods.
D. deriving the exchange rate’s implied standard deviation from the currency option pricing model.
Answer: A. using the absolute forecast error as a percentage of the realized value.
115. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:
A. about .3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about .3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer: C. about .3137 Canadian dollars.
116. When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:
A. closing prices in the U.S. during the previous day.
B. closing prices in Canada during the previous day.
C. prevailing prices in locations where the foreign exchange markets have been open.
D. officially set by central banks before the U.S. market opens.
Answer: C. prevailing prices in locations where the foreign exchange markets have been open.
117. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer: D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
118. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:
A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer: A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
119. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with
A. international monetary credits.
B. dollars.
C. yuan, the Chinese currency.
D. euros, or any other third currency.
Answer: C. yuan, the Chinese currency.
120. In the foreign exchange market, the ________ of one country is traded for the ________ of another country.
A. currency; currency
B. currency; financial instruments
C. currency; goods
D. goods; goods
Answer: A. currency; currency
121. Which of the following examples definitely illustrates a depreciation of the U.S. dollar?
A. The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
B. The dollar exchanges for 250 yen and then exchanges for 275 francs.
C. The dollar exchanges for 100 francs and then exchanges for 120 yen.
D. The dollar exchanges for 120 francs and then exchanges for 100 francs
Answer: D. The dollar exchanges for 120 francs and then exchanges for 100 francs
122. If U.S. inflation suddenly increased while European inflation stayed the same, there wouldbe:
A. an increased U.S. demand for Euros and an increased supply of Euros for sale.
B. a decreased U.S. demand for Euros and an increased supply of Euros for sale.
C. a decreased U.S. demand for Euros and a decreased supply of Euros for sale.
D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.
Answer: D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.
123. Under a fixed exchange rate system:
A. central bank intervention in the foreign exchange market is often necessary;
B. central bank intervention in the foreign exchange market is not necessary since rates do not move;
C. central bank intervention in the foreign exchange market is not permitt
Answer: A. central bank intervention in the foreign exchange market is often necessary;
124. Given a home country and a foreign country, purchasing power parity suggests that:
A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate;
B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
C. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate;
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate;
Answer: B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
more mcqs
125. By definition, currency appreciation occurs when
A. the value of all currencies fall relative to gold.
B. the value of all currencies rise relative to gold.
C. the value of one currency rises relative to another currency.
D. the value of one currency falls relative to another currency.
Answer: C. the value of one currency rises relative to another currency.
126. If purchasing power parity were to hold even in the short run, then:
A. quoted nominal exchange rates should be stable over time.
B. real exchange rates should tend to increase over time;
C. real exchange rates should tend to decrease over time;
D. real exchange rates should be stable over time;
Answer: D. real exchange rates should be stable over time;
127. The international Fisher effect suggests that should pound interest rates exceed US dollarinterest rates:
A. the pound’s value will remain constant;
B. the pound will be at a discount on the dollar;
C. UK inflation rate will decrease.
D. the pound will depreciate against the dollar;
Answer: D. the pound will depreciate against the dollar;
Unit 3
128. Kalons ltd. is a UK-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
A. purchase Canadian dollars forward.
B. purchase Canadian dollar futures contracts.
C. purchase Canadian dollar put options.
D. purchase Canadian dollar call options.
Answer: C. purchase Canadian dollar put options.
129. Which of the following is the most likely strategy for a UK firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A. purchase a call option on francs.
B. sell a futures contract on francs.
C. obtain a forward contract to purchase francs forwa
Answer: B. sell a futures contract on francs.
130. Which of the following is true?
A. Most forward contracts between firms and banks are for speculative purposes.
B. Most future contracts represent a conservative approach by firms to hedge foreign trade.
C. The forward contracts offered by banks have maturities for only four possible dates in the future.
D. none of the above
Answer: D. none of the above
131. European currency options can be exercised _______; American currency options canbe exercised _______.
A. any time up to the expiration date; any time up to the expiration date
B. any time up to the expiration date; only on the expiration date
C. only on the expiration date; only on the expiration date
D. only on the expiration date; any time up to the expiration date
Answer: D. only on the expiration date; any time up to the expiration date
132. A UK corporation has purchased currency call options to hedge a 70,000 dollar payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it acts rationally?
A. £36,750
B. £1,050
C. £37,800
D. £38,850
Answer: D. £38,850
133. Conditional currency options are:
A. options that do not require premiums.
B. options where the premiums are canceled if a trigger level is reached.
C. options that allow the buyer to decide what currency the option will be settled in.
D. none of the above
Answer: B. options where the premiums are canceled if a trigger level is reached.
134. Which of the following are true regarding the options markets?
A. Hedgers and speculators both attempt to lower risk.
B. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C. Hedgers and speculators are both necessary in order for the market to be liqu
Answer: C. Hedgers and speculators are both necessary in order for the market to be liqu
135. The premium of a currency put option will increase if:
A. the volatility of the underlying asset goes up.
B. the time to maturity goes up.
C. the spot rate declines.
D. none of the above
Answer: D. none of the above
136. Which of the following is true of options?
A. The writer decides whether the option will be exercised.
B. The writer pays the buyer the option premium.
C. The buyer decides if the option will be exercis
Answer: C. The buyer decides if the option will be exercis
137. The purchase of a currency put option would be appropriate for which of the following?
A. Investors who expect to buy a foreign bond in one month.
B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C. Corporations who expect to collect on a foreign account receivable in one month.
D. All of the above
Answer: B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
138. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325.The forward rate contains an annualized __________ of ___________%.
A. discount; -18.75
B. premium; 18.75
C. discount; -18.46
D. premium; 18.46
Answer: B. premium; 18.75
139. Translation exposure reflects:
A. the exposure of a firm’s ongoing international transactions to exchange rate fluctuations.
B. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
C. the exposure of a firm’s financial statements to exchange rate fluctuations.
D. the exposure of a firm’s cash flows to exchange rate fluctuations.
Answer: C. the exposure of a firm’s financial statements to exchange rate fluctuations.
140. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer: A. Diz ltd
141. Which of the following operations benefits from depreciation of the firm’s local currency?
A. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
B. purchasing foreign supplies.
C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
D. A and B
Answer: C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
142. Magent ltd. is a UK company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF 200 million and net outflows of DK 500 million. The present exchange rate of the SF is about £0.22 while the present exchange rate of the DK is £0.05. Magent ltd. has not hedged these positions. The SF and DK are highly correlated in their movements against the pound. If the pound weakens, then Magent ltd. will:
A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
B. benefit, because the pound value of its DK position exceeds the pound value of its SF position.
C. be adversely affected, because the pound value of its SF position exceeds the pound value of its DK position.
D. be adversely affected, because the pound value of its DK position exceeds the pound value of its SF position.
Answer: A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
143. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?
A. £150,000 outflow
B. £150,000 inflow
C. £1,666,000 inflow
D. £1,666,000 outflow
Answer: A. £150,000 outflow
144. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ___________ correlated, the MNC’s transaction exposure is relatively ___________.
A. negatively; high
B. negatively; low
C. positively; low
D. none of the above
Answer: B. negatively; low
145. The maximum one-day loss computed for the value-at-risk (VAR) method, does not depend on:
A. the expected percentage change in the currency for the next day.
B. the standard deviation of the daily percentage changes in the currency over a previous period.
C. the current level of interest rates.
D. the confidence level used.
Answer: C. the current level of interest rates.
146. Volusia, plc is a UK-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today’s spot rates, the pound value of the funds to be received is estimated at £500,000 for the euros and £300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the portfolio standard deviation?
A. 3.00%.
B. 5.44%.
C. 17.98%.
D. none of the above
Answer: B. 5.44%.
147. The __________ the percentage of an MNC’s business conducted by its foreign subsidiaries, the _________ the percentage of a given financial statement item that is susceptible to translation exposure.
A. greater; smaller
B. smaller; greater
C. greater; greater
D. none of the above
Answer: C. greater; greater
148. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% forpounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A. 5.13%.
B. 2.63%.
C. 4.33%.
D. 5.55%
Answer: A. 5.13%.
149. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
A. positive.
B. negative.
C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D. zero.
Answer: D. zero.
150. An example of cross-hedging is:
A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
B. use the forward market to sell forward whatever currencies you will receive.
C. use the forward market to buy forward whatever currencies you will receive.
D. B and C
Answer: A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
151. The real cost of hedging payables with a forward contract equals:
A. the nominal cost of hedging minus the nominal cost of not hedging.
B. the nominal cost of not hedging minus the nominal cost of hedging.
C. the nominal cost of hedging divided by the nominal cost of not hedging.
D. the nominal cost of not hedging divided by the nominal cost of hedging.
Answer: A. the nominal cost of hedging minus the nominal cost of not hedging.
152. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A. sell euros forward.
B. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer: A. sell euros forward.
153. A _______ involves an exchange of currencies between two parties, with a promise tore-exchange currencies at a specified exchange rate and future date.
A. long-term forward contract
B. currency swap
C. parallel loan
D. money market hedge
Answer: C. parallel loan
154. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?
A. £101,904
B. £101,923
C. £88,769
D. £84,919
Answer: D. £84,919
155. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today’s spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:
A. 10%.
B. 20%.
C. 30%.
D. 50%.
Answer: C. 30%.
156. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180- day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
A. 10%
B. 30%
C. 40%
D. 70%
Answer: D. 70%
157. Which of the following is the least effective way of hedging transaction exposure in the long run?
A. long-term forward contract.
B. parallel loan.
C. currency swap.
D. money market hedge.
Answer: D. money market hedge.
158. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate,the real cost of hedging payables will be:
A. highly positive.
B. zero.
C. highly negative.
D. none of the above
Answer: C. highly negative.
159. The potential effect of exchange rate fluctuations on foreign direct investment is expressedas _____ exposure.
A. translation
B. transaction
C. conversion
D. economic
Answer: D. economic
160. Which of the following is not one of the steps for currency exposure management:
A. forecast the degree of exposure
B. develop a reporting system to monitor exposure and exchange rate movements
C. buying additional foreign subsidiaries
D. assign responsibility for hedging exposure
Answer: C. buying additional foreign subsidiaries
161. Operational techniques include:
A. diversification of a company’s operations
B. purchasing of currency options
C. exposure netting
D. both A and C
Answer: D. both A and C
162. A(n) _____ hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movements.
A. balance-sheet
B. forward market
C. money market
D. options market
Answer: D. options market
163. Which of the following are rules to use when choosing between forward contracts and currency options:
A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.
B. When the quantity of a foreign-currency cash outflow is unknown, buy the currency forward.
C. When the quantity of a foreign-currency cash flow is partially known and partially uncertain, use a forward contract to hedge the known and unknown portions.
D. When the quantity of a foreign-currency cash inflow is known, buy the currency forward.
Answer: A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.
164. An American firm has just bought merchandise from a British firm for £50,000 on terms of net 90 days. The U.S. company has purchased a 3-month call option of 50,000 pounds at a strike of $1.7 per pound and premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the U.S. company exercise the option at that time or buy British pounds in the spot market?
A. exercise the option
B. buys British pound spot
C. does not make any difference
D. cannot tell
Answer: A. exercise the option
165. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer: A. Diz ltd
166. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?
A. £150,000 outflow.
B. £150,000 inflow
C. £1,666,000 inflow.
D. £1,666,000 outflow.
Answer: A. £150,000 outflow.
167. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimateof the spot rate 90 days from now, then the real cost of hedging payables will be:
A. positive.
B. negative.
C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D. zero.
Answer: D. zero.
168. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will epreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A. sell euros forward.
B. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer: A. sell euros forward.
169. A _______ involves an exchange of currencies between two parties, with a promise to re- exchange currencies at a specified exchange rate and future date.
A. long-term forward contract
B. parallel loan
C. currency swap
D. money market hedge
Answer: C. currency swap
170. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?
A. £101,904
B. £101,923
C. £88,769
D. £84,919
Answer: D. £84,919
171. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today’s spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:
A. 10%.
B. 20%.
C. 30%.
D. 50%.
Answer: C. 30%.
172. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
A. 10%
B. 30%
C. 40%
D. 70%
Answer: D. 70%
173. Which of the following is the least effective way of hedging transaction exposure in the long run?
A. long-term forward contract.
B. currency swap.
C. Parallel Loan
D. Money Market Hedge
Answer: D. Money Market Hedge
174. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
A. highly positive.
B. zero.
C. highly negative.
D. none of the above
Answer: B. zero.
175. With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.
A. are not tax deductible; are taxed
B. are not tax deductible; are not taxed
C. are tax deductible; are taxed
D. are tax deductible; are not taxed
Answer: A. are not tax deductible; are taxed
176. Assume a UK firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _______, which would be _______ than the gain generated by the forward contract.
A. loss; smaller
B. gain; larger
C. loss; larger
D. gain; smaller
Answer: C. loss; larger
177. An effective way for an MNC to assess its economic exposure is to look at the firm’s:
A. income statement.
B. retained earnings.
C. liquidity.
D. level of stockholder’s equity.
Answer: A. income statement.
178. As opposed to transaction exposure, managing economic exposure involves developing a________ solution.
A. short-term
B. immediate
C. long-term
D. none of the above
Answer: C. long-term
179. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30 day forward rate = $.62
A. $630,000.
B. $610,000.
C. $600,000.
D. $590,000.
Answer: D. $590,000.
180. When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are _______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are __________ affected.
A. favorably; favorably affected but by a smaller degree
B. favorably; favorably affected by a higher degree
C. unfavorably; favorably affected
D. favorably; unfavorably affected
Answer: C. unfavorably; favorably affected
181. Which one of the following areas is NOT a way companies often respond to exchange raterisk when they alter their product strategy?
A. shifting the firm’s manufacturing base to another country
B. the timing of new-product introduction
C. changing the size of its product line
D. product innovation with advanced technology
Answer: C. changing the size of its product line
182. A perfect hedge (full coverage) on translation exposure can usually be achieved when:
A. using the money market hedge.
B. using the forward hedge.
C. using the futures hedge.
D. none of the above, since a perfect hedge is nearly impossible.
Answer: B. using the forward hedge.
183. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. Choices:
A. $1,169,000.
B. $1,099,000.
C. $1,106,000.
D. $1,143,100.
Answer: C. $1,106,000.
184. If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements, andis due to receive USD100,000 in 90 days, it could:
A. sell US dollars 90 days from now at the spot rate.
B. enter into a 90-day forward sale of US dollars for euros;
C. purchase US dollars 90 days from now at the spot rate;
D. enter into a 90-day forward purchase of US dollars for euros;
Answer: B. enter into a 90-day forward sale of US dollars for euros;
185. A forward currency transaction:
A. Sets the future date when delivery of a currency must be made at an unknown spot exchange rate
B. Calls for exchange in the future of currencies at an agreed rate of exchange
C. Means that delivery and payment must be made within one business day (USA/Canada) or two business days after the transaction date
D. Is always at a premium over the spot rate
Answer: B. Calls for exchange in the future of currencies at an agreed rate of exchange
186. Two important practical differences between the monetary/non-monetary method and thecurrent rate method of translation is found in their treatment of:
A. Fixed assets and owner’s equity
B. Issued share capital and retained earnings
C. Inventories and fixed assets
D. Monetary assets
Answer: C. Inventories and fixed assets
187. If the Indian subsidiary of a US firm has net exposed assets of Rp9,000,000 and the Indian rupee drops in value from Rp45.00/$ to Rp50.00/$, the US firm has a translation:
A. Loss of $25,000
B. Gain of $20,000
C. Loss of $20,000
D. Gain of $25,000
Answer: C. Loss of $20,000
Unit 4
188. If a UK parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a ____ after the subsidiary is established.
A. strengthening euro
B. stable euro
C. weak euro
D. B and C are both ideal.
Answer: A. strengthening euro
189. Assume the parent of a UK-based MNC plans to completely finance the establishment of its US subsidiary with existing funds from retained earnings in UK operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:
A. the cost of borrowing funds in the U.K.
B. the cost of borrowing funds in the U.S.
C. the parent’s cost of capital.
D. A and B
Answer: C. the parent’s cost of capital.
190. A firm considers an exporting project and will invoice the exports in pounds. The expected cash flows in pounds would be more difficult if the currency of the foreign country is ________.
A. fixed
B. volatile
C. stable
D. none of the above, as the firm is not exposed
Answer: B. volatile
191. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _______ against their home currency, and if their cost of capital is relatively _______.
A. appreciate; low
B. appreciate; high
C. depreciate; high
D. depreciate; low
Answer: A. appreciate; low
192. The impact of blocked funds on the net present value of a foreign project will be greater ifinterest rates are _______ in the host country and there are _______ investment opportunities in the host country.
A. very high; limited
B. very low; limited
C. very low; numerous.
D. very high; numerous
Answer: B. very low; limited
193. A French-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to __________ its estimate of the previously computed net present value.
A. lower
B. increase
C. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
Answer: A. lower
194. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK 10,000,000 NOK 15,000,000 NOK 17,000,000 NOK 20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net
A. -$17,602.62.
B. $8,000,000.
C. $1,048,829.
D. $645,147.
Answer: D. $645,147.
195. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially
A. financed with retained earnings of the parent and of the subsidiary, then:
B. the parent’s perspective should be used to evaluate a foreign project.
C. the subsidiary’s perspective should be used to evaluate a foreign project.
D. the foreign project should enhance the value of both the parent and the subsidiary.
Answer: C. the subsidiary’s perspective should be used to evaluate a foreign project.
196. An international project’s NPV is _________ related to the size of the initialinvestment and _________ related to the project’s required rate of return.
A. positively; positively
B. positive; negatively
C. negatively; positively
D. negatively; negatively
Answer: D. negatively; negatively
197. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _________ in year 1 and _________ in years 2 though 5.
A. depreciates; depreciates
B. appreciates; appreciates
C. depreciates; appreciates
D. appreciates; depreciates
Answer: C. depreciates; appreciates
198. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
A. a more pronounced impact on revenues than on costs.
B. a less pronounced impact on revenues than on costs.
C. the same impact on revenues as on costs.
D. none of the above
Answer: A. a more pronounced impact on revenues than on costs.
199. Which of the following is not true regarding a target’s previous cash flows?
A. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.
B. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
C. They are always good indicators of future cash flows.
D. All of the above are true.
Answer: C. They are always good indicators of future cash flows.
200. Which of the following would probably not cause the stock price of a foreign target todecrease?
A. Its expected cash flows decline.
B. General stock market conditions in the foreign country are deteriorating.
C. Investors anticipate that the target will be acquir
Answer: C. Investors anticipate that the target will be acquir
201. A previously undertaken project in a foreign country may no longer be feasible because:
A. the MNC is unable to raise sufficient funds in order to undertake the project.
B. the MNC’s cost of capital has decreased.
C. the host government has increased its tax rates substantially.
D. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Answer: C. the host government has increased its tax rates substantially.
202. Other things being equal, a foreign subsidiary in China would more likely be divestedby the U.S. parent if new information caused the parent to suddenly anticipate that:
A. the Chinese yuan would depreciate in the future.
B. the Chinese yuan would appreciate in the future.
C. the Chinese yuan would remain somewhat stable in the future.
D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Answer: A. the Chinese yuan would depreciate in the future.
203. A macro-assessment of country risk:
A. is adjusted for the particular business of the firm involved.
B. excludes all aspects relevant to a particular firm or project.
C. A and B
D. none of the above
Answer: B. excludes all aspects relevant to a particular firm or project.
204. The checklist approach:
A. requires several inspections of the country being evaluated.
B. requires the use of discriminant analysis to assess country risk.
C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D. involves the collection of independent opinions on country risk.
Answer: C. requires ratings and weights to be assigned to all factors relevant in assessing country risk.
205. Insurance purchased to cover the risk of expropriation __________, and will typicallycover __________.
A. will be the same for all firms; only a portion of the firm’s total exposure.
B. will be the same for all firms; all of the firm’s total exposure.
C. will be dependent on the firm’s risk; all of the firm’s total exposure.
D. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.
Answer: D. will be dependent on the firm’s risk; only a portion of the firm’s total exposure.
206. If a foreign country follows the “Purchase Homemade Products” philosophy, the least effective strategy would be for a UK firm to:
A. use a licensing arrangement with a local firm in that country.
B. enter into a joint venture in that country.
C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
D. develop a subsidiary (under the US name) that manufactures products in that
Answer: C. develop a subsidiary (under the US name) that manufactures and sells products in that country.
207. A firm may incorporate a country risk rating into the capital budgeting analysis by:
A. adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark level.
B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
C. A and B
D. none of the above
Answer: B. adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
208. ______________ is(are) not a form of political risk.
A. Exchange rate movements
B. Attitude of consumers in the host country
C. Actions of the host government
D. Blockage of fund transfers
Answer: A. Exchange rate movements
209. When quantifying country risk:
A. weights should be equally allocated among factors.
B. weights should be assigned to the political and financial factors according to their perceived importance.
C. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
D. the derived factors will be identical for all MNCs conducting business in that country.
Answer: B. weights should be assigned to the political and financial factors according to their perceived importance.
210. An argument for MNCs to have a debt-intensive capital structure is:
A. they are well diversified.
B. foreign government tax rules may change over time.
C. exposure to exchange rate fluctuations.
D. exposure to fund blockage.
Answer: A. they are well diversified.
211. The capital asset pricing theory is based on the premise that:
A. only unsystematic variability in cash flows is relevant.
B. only systematic variability in cash flows is relevant.
C. both systematic and unsystematic variability in cash flows are relevant.
D. neither systematic nor unsystematic variability in cash flows is relevant.
Answer: B. only systematic variability in cash flows is relevant.
212. One argument for why subsidiaries should be wholly-owned by the parent is that:
A. the potential conflict of interests between the MNC’s managers and shareholders is avoided.
B. the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
C. the potential conflict of interests between the MNC’s existing creditors is avoid
Answer: B. the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
213. Other things being equal, countries with relatively _______ populations and _______ inflation are more likely to have a low cost of capital.
A. young; high
B. old; high
C. old; low
D. young; low
Answer: C. old; low
214. According to the text:
A. the cost of debt for each country is somewhat stable over time.
B. the cost of debt for countries change over time, and these changes are negatively correlated.
C. the cost of debt for countries change over time, and these changes are positively correlat
Answer: C. the cost of debt for countries change over time, and these changes are positively correlat
215. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to your text?
A. exchange rate risk.
B. size.
C. access to international capital markets.
D. international diversification.
Answer: A. exchange rate risk.
216. MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on MNC stock?
A. 21%.
B. 41%.
C. 16%.
D. 13%.
Answer: A. 21%.
217. In general, MNCs probably prefer to use ____________ foreign debt when their foreign subsidiaries are subject to potentially ___________ local currencies.
A. more; strong
B. more; weak
C. less; strong
D. less; weak
Answer: B. more; weak
218. To the extent that individual economies are ______ each other, net cash flows from a portfolio of subsidiaries should exhibit ______ variability, which may reduce the probability of bankruptcy.
A. dependent on; less
B. independent of; less
C. dependent on; more
D. independent of; more
Answer: C. dependent on; more
219. The lower a project’s beta, the _______ is the project’s _________ risk.
A. lower; systematic
B. lower; unsystematic
C. higher; systematic
D. higher; unsystematic
Answer: A. lower; systematic
220. The profitability index is:
A. Net present value/Initial outlay.
B. Initial outlay/Gross present value.
C. Gross present volume/Initial outlay.
D. Gross present value/Net present value.
Answer: C. Gross present volume/Initial outlay.
221. Which of the following is a correct method of adjusting for inflation when calculating net present value?
A. Estimate the future cash flows by multiplying by the specific inflation of each cash inflow and outflow item, and then discount using the real rate of return.
B. Estimate the cash flows in real terms and use a real discount rate.
C. Estimate the cash flows in money terms and use a real discount rate.
D. Estimate the cash flows in real terms and use a money discount rate.
Answer: B. Estimate the cash flows in real terms and use a real discount rate.
222. The relationship between the money rate of return, m, the real rate of return, h, and the inflation rate, i, is expressed in which of the following formulae?
A. h = 1 + i / 1 + m
B. m = h + i
C. (1 + m) = (1 + h)i
D. 1 + h = (1 + m) / (1 + i)
Answer: D. 1 + h = (1 + m) / (1 + i)
223. Which of the following is true? A. Risk is the probability of an outturn being less than anticipated. B. An objective probability is one which can be established mathematically or from historical data. C. The discount rate may be raised or lowered to allow for the risk of a project, the extent of the risk premium being based on indisputable theory.
A. B
B. C
C. A
D. none
Answer: A. B
224. Which of the following statements about sensitivity analysis is false?
A. Sensitivity analysis allows the decision maker to direct search effort by highlighting variables which, when they change by a small percentage, have a large impact on NPV.
B. Sensitivity analysis can be used to highlight variables of greatest significance to NPV, which then allows monitoring in the implementation phase and the drawing up of contingency plans.
C. Sensitivity analysis allows decision makers to be more informed about project sensitivities, to know what room they have for judgemental error and decide whether they are prepared to accept the risks.
D. Sensitivity analysis permits the decision maker to change all the variables simultaneously and thereby examine a project in various different circumstance
Answer: D. Sensitivity analysis permits the decision maker to change all the variables simultaneously and thereby examine a project in various different circumstance
225. Which of the following does not obey the mean-variance rule?
A. Project X will be preferred to project Y if the standard deviation on X and Y is the same, but the expected return on Y is lower.
B. Project X will be preferred to project Y if the expected return on X exceeds that of Y and the variance is equal to or less than that of Y.
C. Project X will be preferred to project Y if the expected return on X and Y is the same, but Y has a higher standard deviation.
D. Project X will be preferred to project Y if the variance of X is higher than Y and the expected return is lower than Y.
Answer: D. Project X will be preferred to project Y if the variance of X is higher than Y and the expected return is lower than Y.
226. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _______ in the host country and there are _______ investment opportunities in the host country.
A. very high; limited
B. very low; limited
C. very low; numerous
D. very high; numerous
Answer: B. very low; limited
227. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK): Year 1 NOK 10,000,000 Year 2 NOK 15,000,000 Year 3 NOK 17,000,000 Year 4 NOK 20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below: Year 1 $.13 Year 2 $.14 Year 3 $.12 Year 4 $.15 Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net p
A. -$17,602.62.
B. $8,000,000
C. $1,048,829.
D. $645,147.
Answer: D. $645,147.
228. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:
A. the parent’s perspective should be used to evaluate a foreign project.
B. the subsidiary’s perspective should be used to evaluate a foreign project.
C. the foreign project should enhance the value of both the parent and the subsidiary.
D. none of the above
Answer: C. the foreign project should enhance the value of both the parent and the subsidiary.
229. An international project’s NPV is _________ related to the size of the initial investment and_________ related to the project’s required rate of return.
A. positively; positively
B. positive; negatively
C. negatively; positively
D. negatively; negatively
Answer: D. negatively; negatively
230. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
A. a more pronounced impact on revenues than on costs.
B. a less pronounced impact on revenues than on costs.
C. the same impact on revenues as on costs.
D. none of the above
Answer: A. a more pronounced impact on revenues than on costs.
231. Which of the following would probably not cause the stock price of a foreign target to decrease?
A. Its expected cash flows decline.
B. General stock market conditions in the foreign country are deteriorating.
C. Investors anticipate that the target will be acquir
Answer: C. Investors anticipate that the target will be acquir
232. Other things being equal, a foreign subsidiary in China would more likely be divested by theU.S. parent if new information caused the parent to suddenly anticipate that:
A. the Chinese yuan would depreciate in the future.
B. the Chinese yuan would appreciate in the future.
C. the Chinese yuan would remain somewhat stable in the future.
D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Answer: A. the Chinese yuan would depreciate in the future.
233. When quantifying country risk:
A. weights should be equally allocated among factors. 186
B. weights should be assigned to the political and financial factors according to their perceived importance.
C. it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
D. the derived factors will be identical for all MNCs conducting business in that country.
Answer: B. weights should be assigned to the political and financial factors according to their perceived importance.
234. The most preferred form of securities for funding by firms in the U.S. is
A. debt
B. preferred stock
C. common stock
D. stock derivatives
Answer: A. debt
235. Which one of the following new issues of stock has the greatest probability of lowering its cost of equity capital?
A. Microsoft in the New York markets
B. Toyota on the Tokyo exchange
C. Apple stock on the London exchange
D. all of the above
Answer: C. Apple stock on the London exchange
236. When computing the weighted average cost of capital, the weighting should be proportionalbased on the ______ rather than the _____ value of the firm.
A. book, market
B. hypothetical, book
C. market, analyst’s
D. market, book
Answer: D. market, book
237. The rate of return on its existing assets that a firm must earn to maintain the current value ofthe firm’s stock is called the:
A. return on equity.
B. internal rate of return.
C. weighted average cost of capital.
D. weighted average cost of equity.
Answer: C. weighted average cost of capital.
238. Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)?
A. An increase in the market risk premium will tend to decrease a firm’s WACC.
B. A reduction in the risk level of a firm will tend to increase the firm’s WACC.
C. A 5 percent increase in a firm’s debt-equity ratio will tend to increase the firm’s WACC.
D. The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
Answer: D. The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
239. Capital structure weights are based on the:
A. market values of a firm’s debt and equity.
B. market value of a firm’s equity and the face value of its debt.
C. initial issue values of a firm’s debt and equity.
D. book value of a firm’s debt and equity.
Answer: A. market values of a firm’s debt and equity.
240. Which one of the following represents the best estimate for a firm’s pre-tax cost of debt?
A. the current yield-to-maturity on the firm’s existing debt
B. the firm’s historical cost of capital
C. twice the rate of return currently offered on risk-free securities
D. the current coupon on the firm’s existing debt
Answer: A. the current yield-to-maturity on the firm’s existing debt
241. A project may be regarded as high risk project when
A. It has smaller variance of outcome but a high initial investment
B. It has larger variance of outcome and high initial investment
C. It has smaller variance of outcome and a low initial investment
D. It has larger variance of outcome and low initial investment
Answer: A. It has smaller variance of outcome but a high initial investment
242. Following is (are) the method(s) for adjustment of risks
A. Risk-adjusted Discounting Rate
B. Risk Equivalence Coefficient Method
C. Both (A) and (B)
D. None of the above
Answer: C. Both (A) and (B)
243. With limited finance and a number of project proposals at hand, select that package of projects which has
A. The maximum net present value
B. Internal rate of return is greater than cost of capital
C. Profitability index is greater than unity
D. Any of the above
Answer: A. The maximum net present value
more mcqs
244. Which of the following is a legitimate reason for international investment?
A. Dividends from a foreign subsidiary are tax exempt in the United States.
B. Most governments do not tax foreign corporations.
C. There are possible benefits from international diversification.
D. International investments have less political risk than domestic investments.
Answer: C. There are possible benefits from international diversification.
245. Theory which considers change in exchange rate with fluctuations in inflation rates isclassified as
A. liquidated power parity
B. purchasing power parity
C. selling power parity
D. volatile power parity
Answer: B. purchasing power parity
246. If purchasing power parity were to hold even in the short run, then:
A. real exchange rates should tend to decrease over time.
B. quoted nominal exchange rates should be stable over time.
C. real exchange rates should tend to increase over time.
D. real exchange rates should be stable over time.
Answer: D. real exchange rates should be stable over time.
247. Given a home country and a foreign country, purchasing power parity suggests that:
A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate
B. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate
C. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate
Answer: C. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate
248. Interest Rate Parity (IRP) implies that:
A. Interest rates should change by an equal amount but in the opposite direction to the difference in inflation rates between two countries
B. The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency
C. The interest rates between two countries start in equilibrium, any change in the differential rate of inflation between the two countries tends to be offset over the longterm by an equal but opposite change in the spot exchange rate
D. In the long run real interest rate between two countries will be equal
Answer: B. The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency
249. In equilibrium position, spread between foreign and domestic rate of interest must be equalto spread of
A. domestic rates
B. forward and spot exchange rates
C. forward rate
D. spot rates
Answer: B. forward and spot exchange rates
250. Rule which states that similar set of goods and services produced in various countriesshould have equal price is classified as
A. law of similar mortgage rate
B. law of one type manufacturing
C. law of similar labor rules
D. law of one price
Answer: D. law of one price
251. Example of derivative securities includes
A. swap contract
B. option contract
C. futures contract
D. all of above
Answer: D. all of above
252. Authority which intervenes directly or indirectly in foreign exchange markets by alteringinterest rates is considered as
A. central government
B. centralized stocks
C. central corporations
D. centralized instruments
Answer: A. central government
253. The forward market is especially well-suited to offer hedging protection against
A. translation risk exposure.
B. transactions risk exposure.
C. political risk exposure.
D. taxation.
Answer: B. transactions risk exposure.
254. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market. This implies that most likely
A. this currency has low exchange-rate risk.
B. this currency is gaining strength in relation to the dollar.
C. interest rates are higher in Japan than in the United States.
D. interest rates are declining in Japan.
Answer: C. interest rates are higher in Japan than in the United States.
255. Hedging is used by companies to:
A. Decrease the variability of tax paid
B. Decrease the spread between spot and forward market quotes
C. Increase the variability of expected cash flows
D. Decrease the variability of expected cash flows
Answer: D. Decrease the variability of expected cash flows
256. Which of the following is true of foreign exchange markets?
A. The futures market is mainly used by hedgers while the forward market is mainly used for speculating.
B. The futures market and the forward market are mainly used for hedging.
C. The futures market is mainly used by speculators while the forward market is mainly used for hedging.
D. The futures market and the forward market are mainly used for speculating.
Answer: C. The futures market is mainly used by speculators while the forward market is mainly used for hedging.
257. Exchange rates
A. are always fixed
B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
C. fluctuate to equate imports and exports
D. fluctuate to equate rates of interest in various countries
Answer: B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
258. An arbitrageur in foreign exchange is a person who
A. earns illegal profit by manipulating foreign exchange
B. causes differences in exchange rates in different geographic markets
C. simultaneously buys large amounts of a currency in one market and sell it in another market
D. None of the above
Answer: C. simultaneously buys large amounts of a currency in one market and sell it in another market
259. A speculator in foreign exchange is a person who
A. buys foreign currency, hoping to profit by selling it a a higher exchange rate at some later date
B. earns illegal profit by manipulation foreign exchange
C. causes differences in exchange rates in different geographic markets
D. None of the above
Answer: A. buys foreign currency, hoping to profit by selling it a a higher exchange rate at some later date
260. A floating exchange rate
A. is determined by the national governments involved
B. remains extremely stable over long periods of time
C. is determined by the actions of central banks
D. is allowed to vary according to market forces
Answer: D. is allowed to vary according to market forces
261. The current system of international finance is a
A. gold standard
B. fixed exchange rate system
C. floating exchange rate system
D. managed float exchange rate system
Answer: D. managed float exchange rate system
262. A simultaneous purchase and sale of foreign exchange for two different dates is called
A. currency devalue
B. currency swap
C. currency valuation
D. currency exchange
Answer: B. currency swap
263. Investment can be defined.
A. Person’s dedication to purchasing a house or flat
B. Use of capital on assets to receive returns
C. Usage of money on a production process of products and services
D. Net additions made to the nation’s capital stocks
Answer: B. Use of capital on assets to receive returns
264. The concept of Financial management is.
A. Profit maximization
B. All features of obtaining and using financial resources for company operations
C. Organization of funds
D. Effective Management of every company
Answer: B. All features of obtaining and using financial resources for company operations
265. What is the primary goal of financial management?
A. To minimise the risk
B. To maximise the owner’s wealth
C. To maximise the return
D. To raise profit
Answer: B. To maximise the owner’s wealth
266. The finance manager is accountable for.
A. Earning capital assets of the company
B. Effective management of a fund
C. Arrangement of financial resources
D. Proper utilisation of funds
Answer: C. Arrangement of financial resources
267. The market value of a share is responsible for.
A. The investment market
B. The government
C. Shareholders
D. The respective companies
Answer: A. The investment market
268. The capital budget is associated with.
A. Long terms and short terms assets
B. Fixed assets
C. Long terms assets
D. Short term assets
Answer: C. Long terms assets
269. CAPM stands for.
A. Capital asset pricing model.
B. Capital amount printing model.
C. Capital amount pricing model.
D. Capital asset printing model.
Answer: A. Capital asset pricing model.
270. What does financial leverage measure?
A. No change with EBIT and EPS
B. The sensibility of EBIT with % change with respect to output
C. The sensibility of EPS with % change in the EBIT level
D. % variation in the level of production
Answer: C. The sensibility of EPS with % change in the EBIT level
271. From the below-mentioned items which are financial assets?
A. Machines
B. Bonds
C. Stocks
D. B and C
Answer: C. Stocks
272. Trade between two countries can be useful if cost ratios of goods are:
A. Undetermined
B. Decreasing
C. Equal
D. Different
Answer: D. Different
273. The term Euro Currency market refers to
A. The international foreign exchange market
B. The market where the borrowing and lending of currencies take place outside the country of issue
C. The countries which have adopted Euro as their currency
D. The market in which Euro is exchanged for other currencies
Answer: B. The market where the borrowing and lending of currencies take place outside the country of issue
274. Which of the following theories suggests that firms seek to penetrate new markets over time?
A. Imperfect Market Theory
B. Product cycle theory
C. Theory of Comparative Advantage
D. None of the above
Answer: B. Product cycle theory
275. Dumping refers to:
A. Reducing tariffs
B. Sale of goods abroad at low a price, below their cost and price in home market
C. Buying goods at low prices abroad and selling at higher prices locally
D. Expensive goods selling for low prices
Answer: B. Sale of goods abroad at low a price, below their cost and price in home market
276. International trade and domestic trade differ because of:
A. Different government policies
B. Immobility of factors
C. Trade restrictions
D. All of the above
Answer: D. All of the above
277. The margin for a currency future should be maintained with the clearing house by
A. The seller
B. The buyer
C. Either the buyer or the seller as per the agreement between them
D. Both the buyer and the seller
Answer: D. Both the buyer and the seller
278. The following statement with respect to currency option is wrong
A. Foreign currency- Rupee option is available in India
B. An American option can be executed on any day during its currency
C. Put option gives the buyer the right to sell the foreign currency
D. Call option will be used by exporters
Answer: D. Call option will be used by exporters
279. Govt. policy about exports and imports is called:
A. Commercial policy
B. Fiscal policy
C. Monetary policy
D. Finance policy
Answer: A. Commercial policy
280. Which of the following is international trade:
A. Trade between countries
B. Trade between regions
C. Trade between provinces
D. Both (b) and (c)
Answer: A. Trade between countries
281. Market in which currencies buy and sell and their prices settle on is called the
A. International bond market
B. International capital market
C. Foreign exchange market
D. Eurocurrency market
Answer: C. Foreign exchange market
282. Purchasing goods from a foreign country is called
A. Import
B. Entrepot
C. Export
D. Re-Export
Answer: A. Import
283. Goods imported for the purpose of export is known as
A. Home trade
B. Foreign trade
C. Entrepot
D. Trade
Answer: C. Entrepot
284. Agents are appointed by?
A. Manufacturer
B. Wholesaler
C. Retailer
D. Principal
Answer: D. Principal
285. Who among these can check the price fluctuations in the market by holding back thegoods when prices fall and releasing the goods when prices rise
A. Agent
B. Mercantile agent
C. Wholesaler
D. Retailer
Answer: C. Wholesaler
286. These are agents whose function is to bring the buyer and the seller into contact.
A. Commission agent
B. Selling agent
C. Broker
D. Stockist
Answer: C. Broker
287. Who among the following appoints the agent
A. Principal
B. Retailer
C. Manufacturer
D. Wholesaler
Answer: A. Principal
288. Which among the following is not concerned with Chambers of Commerce & Industry
A. CII
B. FICCI
C. ICICI
D. ASSOCHAM
Answer: C. ICICI
289. One example of Small scale Fixed retailers among these is
A. Pedlars
B. General stores
C. Hawkers
D. Cheap Jacks
Answer: B. General stores
290. This retail business acts as a universal supplier of a wide variety of products.
A. Multiple shop
B. Mail order Business
C. Tele-shopping
D. Departmental store
Answer: D. Departmental store
291. What is the Bill receivable account?
A. Personal Account
B. Machinery Account
C. Real Account
D. Nominal Account
Answer: C. Real Account
292. A bill of exchange includes.
A. An order to pay
B. A request to pay
C. A promise to pay
D. All the above
Answer: A. An order to pay
293. Which bill is drawn and accepted in the same country?
A. Trade Bill
B. Foreign Bill
C. Inland Bill
D. Accommodation Bill
Answer: C. Inland Bill
294. Who draws a bill of exchange?
A. Creditor
B. Debtor
C. Holder
D. None of the above
Answer: C. Holder
295. What is the person known as who draws a bill of exchange
A. Drawer
B. Payee
C. Drawee
D. None of the above
Answer: A. Drawer
296. What are the three additional days known as that a drawer gives to the drawee forpayment
A. Conditional days
B. Additional days
C. Days of grace
D. Days of rebate
Answer: C. Days of grace
297. When the drawee signs the bill, it is considered as
A. Accepted
B. Retired
C. Renewed
D. Endorsed
Answer: A. Accepted
298. What kind of acceptance is known as when the bill is accepted without any condition?
A. Qualified acceptance
B. Conditional acceptance
C. Blank acceptance
D. General acceptance
Answer: D. General acceptance
299. When the bill is noted from the notary public, it is known as?
A. Noting
B. Discounting
C. Accepting
D. None of the above
Answer: A. Noting
300. What is retiring a bill under rebate means?
A. Making a payment of the bill before the due date
B. Dishonoring of a bill
C. Making a payment of the bill after the due date
D. All of the above
Answer: A. Making a payment of the bill before the due date
301. The most widely used monetary policy tool among these is.
A. Open market operations
B. Issuing of notes
C. Close market operations
D. Discount rate
Answer: A. Open market operations