TEST BANK for International Financial Management 13th Edition for Jeff Madura | All Chapters 1-21

Chapter 01: Multinational Financial Management: An Overview 1. The commonly accepted goal of an MNC is to: a. maximize short-term earnings. b. maximize shareholder wealth. c. minimize risk. d. A and C. e. maximize international sales.

ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 2. With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____. a. shareholder wealth; short-term earnings b. shareholder wealth; shareholder wealth c. short-term earnings; sales volume d. short-term earnings; shareholder wealth ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. For an MNC, agency costs are typically: a. nonexistent b. larger than agency costs of a small purely domestic firm. c. smaller than agency costs of a small purely domestic firm. d. the same as agency costs of a small purely domestic firm.

ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. Which of the following could reduce agency problems for an MNC? a. stock options as managerial compensation b. hostile takeover threat c. investor monitoring d. all of the above are forms of corporate control that could reduce agency problems for an MNC. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____. a. decrease; appreciate b. increase; appreciate c. decrease; depreciate d. increase; depreciate ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. Which of the following theories identifies specialization as a reason for international business? a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. none of the above ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. Which of the following theories identifies the nontransferability of resources as a reason for international business? a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. none of the above ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. Which of the following theories suggests that firms seek to penetrate new markets over time?

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Chapter 01: Multinational Financial Management: An Overview a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. none of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries? a. assembly line production b. specialized professional services c. nuclear missile programs d. development of more sophisticated computer technology ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 10. Due to the risks involved in international business, firms should: a. only consider international business in major countries. b. maintain international business to no more than 20% of total business. c. maintain international business to no more than 35% of total business. d. none of the above ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 11. A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in a franchise in exchange for periodic fees. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

12. Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 13. The agency costs of an MNC are likely to be lower if it: a. scatters its subsidiaries across many foreign countries. b. increases its volume of international business. c. uses a centralized management style. d. A and B. ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 14. An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds. b. a widely dispersed set of individual investors. c. a few pension funds. d. all of the above would prevent agency problems.

ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. The Sarbanes-Oxley Act improved corporate governance of MNCs because it: a. made executives more accountable for verifying financial statements. b. eliminated stock options as a form of compensation. c. tied executive compensation to firm performance. d. placed a limit on the amount of funds that managers can spend.

ANSWER: a DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. MNCs can improve their internal control process by all of the following, except: a. establishing a centralized database of information. b. ensuring that all data are reported consistently among subsidiaries. c. ensuring that the MNC always borrows from countries where interest rates are lowest. d. using a system that checks internal data for unusual discrepancies.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 17. Franchising is the process by which national governments sell state-owned operations to corporations and other investors. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. The parent of an MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 19. If a publicly traded MNC's managers make poor decisions that reduce its value, that may encourage other firms to acquire the MNC. a. True b. False ANSWER: a DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 20. Institutional investors such as mutual funds or pension funds that have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. Four MNCs generate the same level of sales. The MNC that ______________________would likely have the most direct foreign investment. a. exports all of its products b. produces and sells its products locally c. imports products from unrelated firms in other countries and sells them locally d. acquires a foreign firm that produces most of its products to be sold in that foreign country ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. Which of the following is an example of direct foreign investment? a. exporting to a country b. establishing licensing arrangements in a country c. purchasing existing companies in a country d. investing directly (without brokers) in foreign stocks ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 23. According to the text, licensing allows a firm to: a. import without being subject to government restrictions. b. provide its technology for a fee. c. export without government restrictions.

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Chapter 01: Multinational Financial Management: An Overview d. none of the above ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. Assume that an MNC purchases a foreign building, and then leases the building to another party and allows that party to operate the business in the building for 30 years if the party follows standards set by the MNC. This process is referred to as: a. A foreign acquisition. b. franchising. c. a licensing agreement. d. exporting.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 25. Imperfect markets reflect conditions under which factors of production are immobile. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 26. The Sarbanes-Oxley Act (SOX), which was enacted in 2002, required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 27. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).

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Chapter 01: Multinational Financial Management: An Overview a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. The valuation of an MNC is reduced if the required rate of return on its investments in foreign countries is reduced. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. Which of the following is not mentioned in the text as an additional risk resulting from international business? a. exchange rate fluctuations b. political risk c. interest rate risk d. exposure to foreign economies ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____. a. a specialized sales or service strategy; its technology b. its technology; a specialized sales or service strategy c. its technology; its technology d. a specialized sales or service strategy; a specialized sales or service strategy e. its technology; an initial investment ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview 31. Which of the following is not a way in which agency problems can be reduced through corporate control? a. executive compensation b. threat of hostile takeover c. acquisition of a foreign subsidiary d. monitoring by large shareholders ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. The goal of a multinational corporation (MNC) is the maximization of shareholder wealth. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 34. If a U.S. firm sets up a plant in Mexico to benefit from low-cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 35. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview rates are stable over time. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. A centralized management style for an MNC results in relatively high agency costs. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 40. MNCs commonly consider acquiring an existing foreign operation because the cost is less expensive than establishing a new subsidiary of the same size. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 42. If markets were perfect, then labor and other costs of production would be easily transferable. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. International trade: a. is a relatively conservative approach to foreign market penetration. b. entails minimal risk. c. does not require a large amount of investment. d. all of the above.

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Chapter 01: Multinational Financial Management: An Overview ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation? a. international trade b. licensing c. franchising d. direct foreign investment ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 45. The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 46. An MNC's value depends on all of the following, except: a. the MNC's required rate of return. b. the amount of the MNC's cash flows in a particular currency. c. the exchange rate at which cash flows are converted to dollars. d. all of the above factors ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. Which of the following is not an example of political risk? a. Government may impose taxes on a subsidiary.

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Chapter 01: Multinational Financial Management: An Overview b. Government may impose barriers on a subsidiary. c. Consumers may boycott the MNC. d. Consumers' income levels may decrease, thus decreasing consumption.

ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 50. Compared to other methods of international business, international trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions. a. higher; lower b. higher; higher c. lower; higher d. lower; lower ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview 51. Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan.

Which method of international business is most appropriate for Boca Co? a. joint venture b. licensing c. partial acquisition of an existing Japanese firm d. establishment of a Japanese subsidiary ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 52. A decentralized management style results in relatively high agency costs for an MNC. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and the euro's value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of Live Co? a. $200,000 b. $559,500 c. $582,500 d. $393,500 ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value? a. a weaker Mexican economy b. lower Mexican interest rates c. depreciation of the Mexican peso d. appreciation of the Mexican peso.

ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while Jensen establishes the new subsidiary and ____ when the subsidiary starts operations. a. depreciates; appreciates b. appreciates; appreciates c. appreciates; depreciates d. depreciates; depreciates ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 57. A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are the expected dollar cash flows of Livingston Co.? a. $100,000 b. $200,000 c. $160,000 d. $60,000 ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview 62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. The theory of comparative advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 66. Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview capitalize on a foreign country's resources. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 67. Under the product cycle theory, foreign demand can be initially satisfied by exporting. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 69. International trade is the most common form of direct foreign investment (DFI). a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 70. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 72. One form of exposure to political risk is terrorism a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 73. The goal of an MNC is to: a. minimize taxes on funds remitted from foreign subsidiaries. b. establish subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. c. maximize shareholder wealth. d. maximize the social benefits resulting from actions such as the employment of foreign managers.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 74. Agency costs faced by MNCs may be larger than those faced by purely domestic firms because: a. monitoring of managers located in foreign countries is more difficult. b. foreign subsidiary managers raised in different cultures may not follow uniform goals. c. MNCs are relatively large. d. all of the above e. A and B Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 75. Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. establishing a centralized database of information b. ensuring that all data are reported consistently among subsidiaries c. speeding the process by which all departments and all subsidiaries have access to the data that they need d. making executives more accountable for financial statements by personally verifying their accuracy e. All of the above are common methods used by MNCs to improve their internal control process ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 76. Which of the following is not mentioned in the text as a theory of international business? a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. globalization of business theory e. All of the above are mentioned in the text as theories of international business ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 77. When conducting international business, firms generally face the most risk when they: a. engage in franchising. b. make acquisitions of existing operations. c. establish new subsidiaries. d. engage of international trade. e. B and C ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Multinational Financial Management: An Overview STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

78. The least risky method by which firms conduct international business is: a. franchising b. acquisitions of existing operations. c. international trade. d. the establishment of new subsidiaries. e. licensing ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 79. Which of the following does not constitute a form of direct foreign investment? a. franchising b. international trade c. joint ventures d. acquisitions of existing operations e. establishment of new foreign subsidiaries ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.INFM .MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge

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Chapter 02: International Flow of Funds 1. Recently, the U.S. experienced an annual balance of trade representing a ____. a. large surplus (exceeding $100 billion) b. small surplus c. level of zero d. deficit ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 2. A high home inflation rate relative to other countries would ____ the home country's current account balance, other things being equal. High growth in the home income level relative to other countries would ____ the home country's current account balance, other things being equal. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 3. If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments). a. decrease b. increase c. remain unaffected d. either A or C is possible ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 4. ____ purchases more U.S. exports than the other countries listed here. a. Italy b. Spain Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds c. Mexico d. Canada ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 5. An increase in the current account deficit will place ____ pressure on the home currency value, other things being equal. a. upward b. downward c. no d. upward or downward (depending on the size of the deficit) ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same). a. increase b. have no impact on c. reduce d. all of the above are equally possible ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 7. The International Finance Corporation was established to promote economic development: a. in Asia through grants to businesses. b. by providing nonsubsidized loans (at market interest rates) to governments and their agencies. c. by providing low-interest-rate loans (below-market rates) to poor nations. d. through the private sector by providing loans to corporations and investing in their stock.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. The World Bank was established to reduce poverty and promote economic development: a. in Asia through grants to businesses. b. by providing nonsubsidized loans (at market interest rates) to governments and their agencies. c. by providing low-interest-rate loans (below-market rates) to poor nations. d. through the private sector by providing loans to corporations and investing in their stock.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. The International Development Association was established to promote economic development: a. in Asia through grants to businesses. b. by providing nonsubsidized loans (at market interest rates) to governments and their agencies. c. by providing low-interest-rate loans (below-market rates) to poor nations. d. through the private sector by providing loans to corporations and investing in their stock.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 10. 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 e. a tax on income earned from foreign stocks ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

11. The "J-curve" effect describes: a. the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross domestic product. b. the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating. c. the tendency for exporters to initially reduce the price of goods when their own currency appreciates. d. the tendency of a country's currency to initially depreciate after the country's inflation rate declines.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 12. An increase in the use of quotas is expected to: a. reduce the country's current account balance, if other governments do not retaliate. b. increase the country's current account balance, if other governments do not retaliate. c. have no impact on the country's current account balance unless other governments retaliate. d. increase the volume of a country's trade with other countries.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. The United States typically has a balance-of-trade surplus in its trade with ____. a. China b. Japan c. A and B d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 14. The North American Free Trade Agreement (NAFTA) increased restrictions on: a. trade between Canada and Mexico.

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Chapter 02: International Flow of Funds b. trade between Canada and the United States c. direct foreign investment in Mexico by U.S. firms. d. none of the above.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is: a. higher in the United States than in European countries. b. lower in the United States than in European countries. c. higher in the United States than in about half the European countries, and lower in the United States than in the others. d. about the same in the United States as in European countries.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time. a. increased; increased b. increased; decreased c. decreased; decreased d. decreased; increased ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 17. Which of the following countries purchases the largest amount of exports by U.S. firms? a. Mexico b. Japan c. Canada d. France Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. The primary component of the current account is the: a. balance of trade. b. balance of gifts. c. balance of aid payments. d. balance of grant payments.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated. a. member countries and the United States b. member countries c. member countries and European nonmembers d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 20. Over the last several years, international trade has generally: 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: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

21. Which of the following is not a result of the North American Free Trade Agreement (NAFTA)? a. increased trade between the United States and Central American countries b. increased imports by the United States from Mexico c. increased exports by U.S. firms to Mexico d. increased establishment of subsidiaries in Mexico by U.S. firms ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 22. The General Agreement on Tariffs and Trade (GATT) accord of 1993 called for: a. increased trade restrictions outside North America. b. lower trade restrictions around the world. c. uniform environmental standards around the world. d. uniform worker health laws.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 23. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance-of-trade position (increase its exports or reduce its imports)? a. The government could attempt to reduce its home currency's value. b. The government could require firms to engage in outsourcing. c. The government could provide subsidies to importers. d. All of the above are mentioned.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. The demand for U.S. exports tends to increase when: a. economic growth in foreign countries decreases.

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Chapter 02: International Flow of Funds b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 25. The term "dumping" refers to the: a. exporting of goods that do not meet quality standards. b. sale of junk bonds to foreign countries. c. removal of foreign subsidiaries by the host government. d. exporting of goods at prices below cost.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 26. The primary income component in a country’s current account may reflect income received due to: a. grants. b. direct foreign investment. c. aid. d. gifts.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 27. A weak home currency may not be a perfect solution to correct a balance-of-trade deficit because: a. it reduces the prices of imports paid by local companies. b. it increases the prices of exports by local companies. c. it prevents international trade transactions from being prearranged. d. foreign companies may reduce the prices of their products to stay competitive.

ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. Intracompany trade makes up more than ____ percent of all international trade. a. 50 b. 70 c. 25 d. 13 e. 5 ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 29. Like the International Monetary Fund (IMF), the ____ is composed of a number of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. a. World Bank b. International Finance Corporation (IFC) c. World Trade Organization (WTO) d. International Development Association (IDA) e. Bank for International Settlements (BIS) ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. 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. e. offers various forms of political risk insurance.

ANSWER: e POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions. a. World Bank b. International Finance Corporation (IFC) c. World Trade Organization d. International Development Association (IDA) e. Bank for International Settlements (BIS) ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 32. Direct foreign investment into the United States represents a ____. a. capital inflow b. trade inflow c. capital outflow d. trade outflow ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. A balance-of-trade surplus indicates an excess of imports over exports. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to Britain and Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds increase U.S. imports from Britain over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 35. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. The World Bank frequently enters into cofinancing agreements, under which it joins with official aid agencies, export credit agencies, or commercial banks in providing financing. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. The balance of payments is a summary of all transactions between domestic and foreign residents for a specific country over a specified period of time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds 38. The value of financial assets transferred across country borders by people who move to a different country is included in the balance of payments in the capital account. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 41. Exporting of products by one country to other countries at prices below cost is called elasticity. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. The J-curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 44. Outsourcing is the process of subcontracting to a third party in another country to provide supplies or services that were previously obtained internally. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 45. Intracompany trade is the exporting of products by one country to other countries below cost. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 46. A tariff is a maximum limit on imports. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. A country's net outflow of funds ____ its interest rates, and ____ its economic conditions. a. affects; affects b. affects; does not affect c. does not affect; does not affect d. does not affect; affects ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 51. In recent years, the United States has had a relatively (compared to other countries) ____ balance of trade ____ with China. a. small; surplus b. large; surplus c. small; deficit d. large; deficit ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the United States, the Dominican Republic, and Central American countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds 53. U.S. government officials would likely prefer that China devalue the yuan against the dollar. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, that should reduce the U.S. balance-of-trade deficit with China. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 55. Assume the United States has a balance-of-trade surplus with the country of Thor. When individuals in Thor without permission manufacture video games and DVDs that look almost exactly like the original products produced in the United States and other countries, they ____ the U.S. balance-of-trade surplus with Thor. This activity is called ____. a. reduce; flipping b. reduce; piracy c. increase; piracy d. increase; flipping ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 56. Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____. a. low; small b. high; small c. low; large d. high; large ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 57. Without international capital flows, there would be ____ funding available in the United States across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level. a. more; lower b. more; higher c. less; lower d. less; higher ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. The primary component of the capital account is the balance of trade. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 59. A balance-of-trade surplus indicates an excess of merchandise imports over merchandise exports. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance.

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Chapter 02: International Flow of Funds a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 61. A balance-of-trade deficit indicates an excess of imports over exports. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 62. The capital account reflects changes in country ownership of direct foreign investment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the United Kingdom and increase U.S. imports from the United Kingdom.

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Chapter 02: International Flow of Funds a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 65. The World Trade Organization was established to provide a forum for multilateral trade negotiations and to settle trade disputes. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 66. The ____ is the difference between exports and imports. a. balance of trade b. balance on goods and services c. balance of payments d. current account e. capital account ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 67. Which of the following will probably not result in an increase in a country's current account balance (assuming everything else remains constant)? a. a decrease in the country's rate of inflation b. a decrease in the country's national income level c. an increase in government restrictions in the form of tariffs or quotas d. an appreciation of the country's currency e. All of the above will result in an increased current account balance.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 68. Which of the following is a key component that determines a country’s primary income (within the country’s current account)? a. direct foreign investment b. international trade c. tax rates d. gifts ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 69. The ____, an accord among 117 nations, called for lower tariffs around the world. a. General Agreement on Tariffs and Trade (GATT) b. North American Free Trade Agreement (NAFTA) c. Single European Act of 1987 d. European Union Accord e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance-oftrade deficit with Country Y? a. The government of Country X eliminates environmental restrictions. b. The government of Country X subsidizes firms in its country to facilitate dumping. c. The government of Country X provides tax breaks to firms in specific industries. d. The government of Country X removes a tariff on goods imported from Country Y. ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 71. Which of the following statements is not true? a. Exporters commonly complain that they are being mistreated because the currency of their country is too weak. b. Outsourcing affects the balance of trade because it means that a service is purchased in another country. c. Sometimes, trade policies are used to punish countries for various actions. d. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries. e. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 72. ____ represents aid, grants, and gifts from one country to another. a. Secondary income b. Primary income c. The balance of trade d. The balance of payments e. The capital account ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 73. Which of the following is not a goal of the International Monetary Fund (IMF)? a. To promote cooperation among countries on international monetary issues b. To promote stability in exchange rates c. To enhance a country's long-term economic growth via the extension of structural adjustment loans d. To promote free trade e. To promote free mobility of capital funds across countries ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: International Flow of Funds LEARNING OBJECTIVES: INFM.MADU.15.02.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 74. According to the "J-curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance. a. decrease; increase b. increase; decrease c. decrease; decrease d. increase; increase ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.02.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 03: International Financial Markets 1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid/ask percentage spread is: a. about 4.44%. b. about 4.26%. c. about 4.03%. d. about 4.17%.

ANSWER: b RATIONALE: Bid/ask percentage spread = ($.47 − $.45)/$.47 = 4.26% POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid/ask percentage spread is: a. about 4.99%. b. about 4.88%. c. about 4.65%. d. about 4.43%.

ANSWER: c RATIONALE: Bid/ask percentage spread = ($.0043 − $.0041)/$.0043 = 4.65% POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent. a. 3 to 7 b. .01 to .03 c. 10 to 15 d. .5 to 1 ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. Which of the following is not a factor that affects the bid/ask spread? a. order costs b. inventory costs c. volume Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets d. All of the above factors affect the bid/ask spread ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 5. The forward rate is the exchange rate used for immediate exchange of currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 6. The ask quote is the price at which a bank offers to sell a currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. According to the text, the forward rate is commonly used for: a. hedging. b. immediate transactions. c. previous transactions. d. bond transactions.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets 8. If a U.S. firm is receiving 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could: a. purchase a 90-day forward contract on euros. b. sell a 90-day forward contract on euros. c. purchase euros 90 days from now at the spot rate. d. sell euros 90 days from now at the spot rate.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 9. If a U.S. firm will need C$200,000 in 90 days to pay for imports from Canada and it wishes to avoid the risk from exchange rate fluctuations, it could: a. purchase a 90-day forward contract on Canadian dollars. b. sell a 90-day forward contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 10. Assume the Canadian dollar is equal to $.88 and the Peruvian nuevo sol is equal to $.35. The value of the Peruvian nuevosol in Canadian dollars is: a. about .3621 Canadian dollars. b. about .3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars.

ANSWER: b $.35/$.88 = .3977 RATIONALE: POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 11. Which of the following is not true with respect to spot market liquidity? a. The more willing buyers and sellers there are, the more liquid a market is.

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Chapter 03: International Financial Markets b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid. c. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency. d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. Forward markets for currencies of developing countries are: a. prohibited. b. less liquid than markets for currencies of developed countries. c. more liquid than markets for currencies of developed countries. d. only available for use by government agencies.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 13. A forward contract can be used to lock in the ____ of a specified currency at a future point in time. a. purchase price b. sale price c. A or B d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 14. The forward market: a. for euros is very illiquid. b. for currencies of Eastern European countries is very liquid. c. does not exist for some currencies. d. none of the above ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 15. ____ is not a bank characteristic important to customers in need of foreign exchange. a. Quote competitiveness b. Speed of execution c. Forecasting advice d. Advice about current market conditions e. All of the above are important bank characteristics to customers in need of foreign exchange.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 16. The Basel III accord requires banks to: a. maintain higher levels of capital if they have riskier assets. b. increase lending to less developed countries. c. pay higher premiums for deposit insurance. d. reduce their short-term loans.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 17. The international money market primarily concentrates on: a. short-term lending (one year or less). b. medium-term lending. c. long-term lending. d. placing bonds with investors. e. placing newly issued stock in foreign markets.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. The international credit market primarily concentrates on: a. short-term lending (less than one year). b. medium-term lending. c. credit cards for individuals. d. providing an exchange of foreign currencies for firms that need them. e. placing newly issued stock in foreign markets.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. The main participants in the international money market are: a. consumers. b. small firms. c. large corporations. d. small European firms needing European currencies for international trade.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 20. 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. e. the maximum interest rate offered on bonds that are issued in London.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets 21. A syndicated loan: a. represents a loan by a single bank to a syndicate of corporations. b. represents a loan by a single bank to a syndicate of country governments. c. represents a direct loan by a syndicate of oil-producing exporters to a less developed country. d. represents a loan by a group of banks to a borrower. e. A and B ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 22. The international money market is primarily served by: a. the governments of European countries, which directly intervene in foreign currency markets. b. government agencies such as the International Monetary Fund that promote development of countries. c. several large banks that accept deposits and provide loans in various currencies. d. small banks that convert foreign currency for tourists and business visitors.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 23. Which of the following is true of international money market securities? a. The securities may be exposed to exchange rate risk. b. The securities are perceived to be very risky. c. The securities issued by corporations are not subject to credit (default) risk. d. The securities have a maturity of one to five years.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 25. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 26. As a result of the Smithsonian Agreement, the U.S. dollar was: a. the currency to be used by all countries as a medium of exchange for international trade. b. forced to be freely floating relative to all currencies without any boundaries. c. devalued relative to major currencies. d. revalued (upward) relative to major currencies.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 27. According to the text, the average foreign exchange trading around the world ____ per day. a. equals about $200 billion b. equals about $400 billion c. equals about $700 billion d. exceeds $4 trillion ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

28. Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward. a. depreciate; buying b. depreciate; selling c. appreciate; selling d. appreciate; buying ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 29. The bid/ask spread on an exchange rate can be used to directly determine: a. how an exchange rate will change. b. the transaction cost of foreign exchange. c. the forward premium. d. the currency option premium.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. Futures contracts are typically ____; forward contracts are typically ____. a. sold on an exchange; sold on an exchange b. sold in an over-the-counter market; sold on an exchange c. sold on an exchange; sold in an over-the-counter market d. offered by commercial banks; offered by commercial banks ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 31. Eurobonds: Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets a. are usually issued in bearer form. b. typically carry several protective covenants. c. cannot contain call provisions. d. A and B ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 32. Which of the following is true? a. Non-U.S. firms may desire to issue bonds in the United States due to less regulation there. b. U.S. firms may desire to issue bonds in the United States due to less regulation there. c. U.S. firms may desire to issue bonds in non-U.S. markets due to less regulation in some other countries. d. A and B ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. Eurobonds: a. can be issued only by European firms. b. can be sold only to European investors. c. A and B d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. Which currency is used the most to denominate Eurobonds? a. the British pound b. the Japanese yen c. the U.S. dollar d. the Swiss franc ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations will be based on the: a. closing prices in the United States during the previous day. b. closing prices in Canada during the previous day. c. prevailing prices in locations where the foreign exchange markets are already open. d. officially set by central banks before the U.S. market opens.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. The U.S. dollar is not accepted as a medium of exchange in: a. industrialized countries outside the United States. b. in any Latin American countries. c. in Eastern European countries where foreign exchange restrictions exist. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. Which of the following is not true regarding the Bretton Woods Agreement? a. It called for fixed exchange rates between currencies. b. Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels. c. The agreement lasted from 1944 until 1971. d. Each country used gold to back its currency. e. All of the above are true regarding the Bretton Woods Agreement.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? a. 73.75. b. 125. c. 1.69. d. 0.014. e. none of the above ANSWER: d ($.008/$.59) = F$.014/¥ RATIONALE: POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 39. Global regulations prevent the internationalization of moeny markets. a. True b.

False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets 41. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 42. The Single European Act prevented a trend toward increased globalization in the banking industry. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets 45. The strike price is also known as the premium price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 46. The interest rate commonly charged for loans between banks is called the cross rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. The Basel Accord is an agreement among the major European countries to make regulations on imports more uniform across European countries and to reduce taxes on goods traded between these countries. a. True b.

False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

49. A currency futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 50. Eurobonds are certificates representing bundles of stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 51. 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 e. none of the above ANSWER: c RATIONALE: 15 × $1.10 = $16.50 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.

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Chapter 03: International Financial Markets a. 48.90 b. 146.70 c. 55.21 d. none of the above ANSWER: b RATIONALE: 3 × 30 × $1.63 = $146.70 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 53. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 55. The preferences of corporations and governments to borrow in foreign currencies on a short-term basis and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 56. Large commercial banks play a major role in the international money market by accepting short-term deposits in various currencies, and channeling the money to corporations and government agencies that need to borrow those shortterm funds in the desired currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 57. The term LIBOR refers to international bonds that were issued in London. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. The Greece credit crisis in the 2012-2015 period refers to Greece being unable to obtain loans from any banks or governments. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 59. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. As a result of the Sarbanes-Oxley Act, financial reporting costs were reduced, and many non-U.S. firms decided to place new issues of their stock in the United States. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 61. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 62. Shareholders have more voting power in some countries than in others. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 63. Shareholders can have influence on a wider variety of management issues in some countries than in others. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. The legal protection of shareholders is the same among countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. Shareholders in some countries may have more power to effectively sue publicly traded firms if their executives or directors commit financial fraud. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 66. In general, common-law countries such as the United States, Canada, and the United Kingdom allow for more legal protection of shareholders than civil-law countries such as France and Italy. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 67. The government enforcement of securities laws varies among countries. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 68. The degree of financial information that must be provided by public companies is the same in all countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 69. In general, stock markets allow for more governance and attract more investors when they have all of the following except: a. more voting rights for shareholders. b. more legal protection for shareholders. c. more enforcement of the laws. d. less stringent accounting requirements.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 70. In general, investors are attracted to stock markets in countries that allow very limited voting rights for shareholders. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 71. If companies cannot rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets raise long-term funds. a. Derivative b. bond c. Money d. foreign exchange ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 72. The strike price on a currency option is also known as the exercise price. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 73. Assume that the bank's bid quote for the Mexican peso is $.126 and the ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? a. 12,600 b. 775,194 c. 793,651 d. 12,900 ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 74. When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 75. An obligation to purchase a specific amount of currency at a specific exchange rate at a future point in time is called a: a. call option b. spot contract c. put option d. forward contract e. both B and D ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 76. Which of the following cannot be used to invest internationally? a. investment in MNC stocks b. American depository receipts (ADRs) c. exchange-traded funds (ETFs) d. international mutual funds e. All of the above can be used to invest internationally.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 77. The interest rate in developing countries is usually very low. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets 78. Assume that $1 is equal to .85 euros and 98 yen. The value of the yen in euros is a. .01 b. 118 c. 1.18 d. .0087 ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 79. When obtaining a loan, the risk premium depends on the: a. risk-free interest rate of the borrower. b. credit risk of the borrower. c. borrower's stock price. d. lender's stock price.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 80. Eurodollar deposits consisting of the oil revenues of oil-producing countries are known as: a. euros. b. petro-euros. c. petrodollars. d. petro deposits.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 81. Which of the following is not true about syndicated loans? a. A borrower that receives a syndicated loan incurs various fees besides the interest rate. b. The loans are only denominated in U.S. dollars. c. The loans are provided by a group of banks to a borrower. d. All of the above are true Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 82. The interest rate on the syndicated loan depends all of the following except: a. currency denominating the loan. b. maturity of the loan. c. creditworthiness of the borrower. d. loan provisions set by the International Monetary Fund ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation? a. Buy dollars forward. b. Sell dollars forward. c. Purchase call option. d. Purchase put option.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 84. Certificates representing bundles of the stock of a non-U.S. firm are called: a. Eurobonds. b. ADRs. c. FRNs. d. LIBOR certificates.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars? a. 10 b. 13.28 c. 30.12 d. 39.84 ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 86. Which of the following is not true regarding ADRs? a. ADRs are denominated in the currency of the stock's home country. b. ADRs enable U.S. investors to avoid cross-border transactions. c. ADRs allow non-U.S. firms to tap into the U.S. market for funds. d. ADRs sometimes allow for arbitrage opportunities.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 87. The more intense the competition for a traded currency, the larger the bid/ask spread. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 88. The bid/ask spreads quoted on more liquid, heavily traded currencies are larger than the spreads on less liquid, less traded currencies. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 89. At any given point in time, a bank's bid quote will be greater than its ask quote. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 90. An MNC with receivables in Japanese yen purchases yen forward to hedge its exposure to exchange rate fluctuations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 91. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 92. The LIBOR varies among currencies because the market supply of and the demand for funds vary among currencies. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 93. The international money market is frequently accessed by MNCs for short-term investment and financing needs, while longer-term financing needs are met in the international credit market or the international bond market and in international stock markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 94. Which of the following is not a possible bid/ask quotation for the Barbados dollar? a. $.50/$.51 b. $.49/$.50 c. $.52/$.51 d. $.51/$.52 e. All of the above are possible bid/ask quotations.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? a. $44,500 b. $45,000 c. $526 million d. $47,500 e. $556 million ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 96. Which of the following is probably not an example of the use of forward contracts by an MNC? a. Hedging pound payables by selling pounds forward b. Hedging peso receivables by selling pesos forward c. Hedging yen payables by purchasing yen forward d. Hedging peso payables by purchasing pesos forward e. All of the above are examples of using forward contracts.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation. a. direct; indirect b. indirect; direct c. direct; direct d. indirect; indirect e. cannot be answered without more information ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$. a. direct; 142.86 b. indirect; 142.86 c. indirect; 150 d. direct; 150 e. indirect; 0 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 99. Which of the following is not true regarding electronic communications networks (ECNs)? a. They have a visible trading floor. b. Trades are executed by a computer network. c. They have been created in many countries to match orders between buyers and sellers. d. They allow investors to place orders on their computers. e. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 100. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables? a. Purchase pounds forward. b. Buy a pound futures contract. c. Buy a pound put option. d. Buy a pound call option.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 101. The process by which higher credit risk in one country is transmitted to another country is called: a. interest rate risk. b. credit contagion. c. .intermediation d. negative cointegration ANSWER: b POINTS: 1 DIFFICULTY: Moderate NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: International Financial Markets STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

102. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium-term debt financing decisions are satisfied in the ____ market. a. international money; international credit b. international money; international bond c. international credit; international money d. international bond; international credit e. international money; international stock ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____ percent a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00 ANSWER: c RATIONALE: ($0.73 − $0.69)/$0.69 = 5.80% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a. liquid; highly sensitive b. illiquid; insensitive c. illiquid; highly sensitive d. none of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. ____ are not a factor that causes currency supply and demand schedules to change. a. Relative inflation rates b. Relative interest rates c. Relative income levels d. Expectations e. All of the above are factors that cause currency supply and demand schedules to change.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination c. decrease; depreciate d. decrease; appreciate ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a. reduce; increase b. increase; reduce c. reduce; reduce d. increase; increase ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. Investors from Germany, the United States, and the United Kingdom frequently invest in each other’s currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar. a. fewer; depreciate b. fewer; appreciate c. more; depreciate d. more; appreciate ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 7. When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be: a. weak, since the country's quoted interest rate would be high relative to the inflation rate. b. strong, since the country's quoted interest rate would be low relative to the inflation rate. c. strong, since the country's quoted interest rate would be high relative to the inflation rate. d. weak, since the country's quoted interest rate would be low relative to the inflation rate.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 9. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 10. Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% 7.28% Euro (€) 6.80% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? a. $579,845. b. $583,800. c. $588,200. d. $584,245. e. $980,245.

ANSWER:

a

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Chapter 04: Exchange Rate Determination RATIONALE:

1.

Borrow €20 million.

2.

Convert the €20 million to €20,000,000 × $1.13 = $22,600,000.

3.

Invest the $22,600,000 at an annualized rate of 6.73% for 90 days. $22,600,000 × [1 + 6.73% (90/360)] = $22,980,245

4.

Determine euros owed: €20,000,000 × [1 + 7.28% (90/360)] = €20,364,000.

5.

Determine dollars needed to repay euro loan: €20,364,000 × $1.10 = $22,400,400.

6.

The dollar profit is $22,980,245 − $22,400,400 = $579,845.

DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 11. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus e. be equal to; shortage ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. The real interest rate adjusts the nominal interest rate for: a. exchange rate movements. b. income growth. c. inflation. d. government controls. e. none of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 13. If U.S. inflation suddenly increased while European inflation stayed the same, there would be: 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 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 14. If inflation in New Zealand suddenly increased while U.S. 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 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects: a. an increased demand for British pounds. b. a decrease in the demand for British pounds. c. an increase in the supply of British pounds for sale. d. a decrease in the supply of British pounds for sale.

ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. The exchange rates of smaller countries are very stable because the market for their currency is very liquid. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

17. The phrase "the dollar was mixed in trading" means that: a. the dollar was strong in some periods and weak in other periods over the last month. b. the volume of trading was very high in some periods and low in other periods. c. the dollar was involved in some currency transactions, but not others. d. the dollar strengthened against some currencies and weakened against others.

ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate.

Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 19. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 20. Any event that reduces the U.S. 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; the U.S. dollar Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 21. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 23. Assume that the United States experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.) a. upward b. downward c. no d. upward and downward (offsetting) ANSWER: b DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. 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 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 25. Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 26. Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 27. Which of the following is not mentioned in the text as a factor affecting exchange rates? a. relative interest rates b. relative inflation rates c. government controls d. expectations e. all of the above are mentioned in the text as factors affecting exchange rates.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 28. If a country experiences high inflation relative to the United States, its exports to the United States 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 e. increase; decrease; upward ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. a. increase; decrease; downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward e. increase; increase; upward ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 33. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 34. The main effect of interest rate movements on exchange rates is through their effect on international trade. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 36. Increases in relative income in one country versus another result in an increase in the first country's currency value. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 37. Trade-related foreign exchange transactions are more responsive to news than financial flow transactions. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. Expectations of a currency crisis may trigger actions by investors and speculators that make the crisis worse. a. True b. False ANSWER: a DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. When investors engage in the “carry trade,” they attempt to capitalize on the difference in interest rates between two countries by borrowing a currency with a low interest rate and investing the funds in a currency with a high interest rate. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. A currency’s liquidity can affect the extent to which speculation can impact the currency's value. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 41. Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency’s value will change, and how they will interact to impact the currency's value a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 42. The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

43. Movements of foreign currencies tend to be more volatile for shorter time horizons. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. Capital flows have become _______ over time; a significant portion of capital flows are due to _______ . a. remained about the same; large institutional investors b. smaller; international trade c. larger; large institutional investors d. larger; international trade ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 45. The value of the euro was $1.30 last week. During last week the euro depreciated by 5 percent. What is the value of the euro today? a. $1.365 b. $1.235 c. $1.330 d. $1.30 ANSWER: b RATIONALE: $1.3 × (1 − .05) = $1.235 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 46. Government controls can affect only the supply of a given currency for sale and not the demand. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. If one foreign currency appreciates against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 48. Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country.. This will place ____ pressure on the value of the British pound. a. downward; downward b. upward; downward c. upward; upward d. downward; upward ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 49. If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant). a. be unchanged b. depreciate c. appreciate d. depreciate but only briefly ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 50. Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect. a. downward; more b. upward; more c. downward; less d. upward; less ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 51. If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar. a. appreciate b. depreciate c. remain unchanged d. cannot be determined from the information provided ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 52. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____. a. yen; dollars b. yen; yen c. dollars; yen d. dollars; dollars ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 53. British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar. a. increase; downward b. decrease; upward c. increase; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination d. decrease; downward ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 54. The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus ANSWER: a DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 55. Financial flow foreign exchange transactions are more responsive to news than trade-related transactions are. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 56. Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____. a. increase; increase; increase b. decrease; increase; decrease c. remain unchanged; increase; decrease d. remain unchanged; increase; increase ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 57. Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 58. Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately. a. upward b. downward c. no d. cannot be determined ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 59. When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 60. Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination KEYWORDS:

Bloom's: Knowledge

61. The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 62. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 63. If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. A financial institution that expects a particular foreign currency to appreciate may try to benefit from its expectation by borrowing funds in that currency and repaying the loan after the exchange rate changes in the expected manner. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 65. Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions. a. less; even minor b. less; only large c. more; even minor d. more; only large e. none of the above ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 66. Which of the following events would most likely result in an appreciation of the U.S. dollar? a. U.S. inflation is very high. b. The Fed indicates that it will raise U.S. interest rates. c. Future U.S. interest rates are expected to decline. d. Japan is expected to increase interest rates in the near future.

ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 67. Which of the following situations is most likely to strengthen the yen’s value against the dollar? Assume everything else is held constant. a. a reduction in U.S. inflation accompanied by an increase in Japan’s inflation b. a reduction in U.S. inflation accompanied by an increase in U.S. interest rates c. an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates d. a reduction in Japan’s inflation accompanied by an increase in Japan’s interest rates ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 68. If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; downward b. decrease; upward c. increase; downward d. increase; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 69. If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country’s investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value. a. increase; downward b. decrease; upward c. increase; upward d. decrease; downward ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 05: Currency Derivatives 1. Kalons, Inc. is a U.S.-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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros. a. 224,000 b. 220,000 c. 200,000 d. 230,000 ANSWER: b RATIONALE: €200,000 × $1.10 = $220,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent. a. discount; 1.9 b. discount; 1.8 c. premium; 1.9 d. premium; 1.8 ANSWER: b RATIONALE: (F/S) − 1 = ($1.60/$1.63) − 1 = −1.8 percent.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Application

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? a. 1.9 percent discount b. 1.9 percent premium c. 7.6 percent premium d. 7.6 percent discount ANSWER: c RATIONALE: [(F/S) − 1] × 360/90 = 7.6 percent.

FEEDBACK: a. b. c. SOLUTION: [(F/S)  1]  360/90 = 7.6 percent. d.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 5. Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations.

Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction.

Thus, Thornton would: a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. b. convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. d. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Analysis 6. In the United States, the typical currency futures contract is based on a currency value in terms of: a. euros. b. U.S. dollars. c. British pounds. d. Canadian dollars.

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Chapter 05: Currency Derivatives ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 7. Currency futures contracts sold on an exchange contain: a. a commitment to the owner, and are standardized. b. a commitment to the owner, and can be tailored to the owner’s desire. c. a right but not a commitment to the owner, and can be tailored to the owner’s desire. d. a right but not a commitment to the owner, and are standardized.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 8. Currency options sold through an options exchange contain: a. a commitment to the owner, and are standardized. b. a commitment to the owner, and can be tailored to the owner’s desire. c. a right but not a commitment to the owner, and can be tailored to the owner’s desire. d. a right but not a commitment to the owner, and are standardized ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 9. Currency options are commonly traded through the ____ system. a. robot b. Euro c. Globex d. Scope ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Knowledge

10. Forward contracts contain: a. a commitment to the owner, and are standardized. b. a commitment to the owner, and can be tailored to the owner’s desire. c. a right but not a commitment to the owner, and can be tailored to the owner’s desire. d. a right but not a commitment to the owner, and are standardized.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 11. Which of the following is the most likely strategy for a U.S. 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 forward. d. All of the above are appropriate strategies for the scenario described.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 12. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing 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. Obtain a forward contract to purchase francs forward. c. Sell a futures contract on francs. d. All of the above are appropriate strategies for the scenario described.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Analysis 13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives forward in the forward exchange market. a. selling; selling b. selling; purchasing c. purchasing; purchasing d. purchasing; selling ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. a. call options; put options b. futures contracts; call options c. forward contracts; futures contracts d. call options; forward contracts ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 15. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things being equal. a. greater; lower b. greater; greater c. lower; greater d. lower; lower ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 16. When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread. a. less; narrower b. more; narrower Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives c. more; wider d. less; wider ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things being equal. a. greater; greater b. greater; lower c. lower; lower d. lower; greater ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: a. $1,562.50. b. −$1,562.50. c. −$1,250.00. d. −$625.00.

ANSWER: RATIONALE:

b The premium of the option is $.05 × (31,250 units) = $1,562.50. Since the option will not be exercised, the net profit is −$1,562.50.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 19. Which of the following is true? a. The futures market is used for both hedging and speculating while the forward market is primarily used for hedging.

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Chapter 05: Currency Derivatives b. The futures market is used for both hedging and speculating while the forward market is primarily used for speculating. c. Both the futures market and the forward market are primarily used for speculating. d. The futures market is primarily used for hedgingwhile the forward market is used for speculating.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 20. Which of the following is true? a. Most forward contracts between firms and banks are for speculative purposes. b. A security deposit is not required for futures contracts. c. The forward contracts offered by banks have maturities for only four possible dates in the future. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. a. buy a euro call and buy a euro put b. buy a euro call and sell a euro put c. sell a euro call and sell a euro put d. sell a euro call and buy a euro put ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. a. purchasing; selling b. purchasing; purchasing c. selling; selling d. selling; purchasing Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Analysis 23. Which of the following is correct? a. The longer the time to maturity, the lower the value of a currency call option, other things being equal. b. The longer the time to maturity, the lower the value of a currency put option, other things being equal. c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 24. Research has found that the options market is: a. efficient before controlling for transaction costs. b. efficient after controlling for transaction costs. c. highly inefficient. d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: a. definitely be above the 180-day forward rate. b. definitely be below the 180-day forward rate. c. be about the same as the 180-day forward rate. d. none of the above; there is no relation between the futures and forward prices.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 26. Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price. a. put upward pressure on; put upward pressure on b. put downward pressure on; put upward pressure on c. put upward pressure on; put downward pressure on d. put downward pressure on; put downward pressure on ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 27. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: a. buying an identical futures contract. b. selling an identical futures contract. c. buying a futures contract with a different settlement date. d. selling a futures contract for a different amount of currency. e. purchasing a put option contract in the same currency.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 28. If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period. a. increase slightly b. decrease substantially c. increase substantially d. stay the same ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by: a. selling futures in francs. b. buying futures in francs. c. buying franc put options. d. buying franc call options.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? a. $6,875,000. b. $7,250,000. c. $7,000,000. d. $6,500,000. e. none of the above ANSWER: d RATIONALE: Dollars received from exercising option = NZ$12.5 million × $.55 = $6,875,000. Premium paid for options = NZ$12.5 million × $.03 = $375,000. Amount of dollars received minus premium = $6,500,000.

FEEDBACK: a. b. c. d. SOLUTION: Dollars received from exercising option = NZ$12.5 million  $.55 = $6,875,000. Premium paid for options = NZ$12.5 million  $.03 = $375,000.

Amount of dollars received minus premium = $6,500,000.

e.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application

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Chapter 05: Currency Derivatives 31. If you purchase a straddle on euros, this implies that you: a. finance the purchase of a call option by selling a put option in the euros. b. finance the purchase of a call option by selling a call option in the euros. c. finance the purchase of a put option by selling a put option in the euros. d. finance the purchase of a put option by selling a call option in the euros. e. none of the above ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.63; $1.63 b. $1.63; $1.60 c. $1.63; $1.57 d. $1.57; $1.63 e. none of the above ANSWER: e RATIONALE: Break-even point on put option to both the buyer and seller is $1.60 − $.03 = $1.57.

FEEDBACK: a. b. c. d. SOLUTION: Break-even point on put option to both the buyer and seller is $1.60  $.03 = $1.57.

e.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is: a. 0 percent. b. 25 percent. c. 50 percent. d. 150 percent. e. none of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives ANSWER: RATIONALE:

c The net profit per unit is: $.87 − $.81 − $.04 = $.02. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.

FEEDBACK:

a. b. c. SOLUTION: The net profit per unit is: $.87  $.81  $.04 = $.02. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.

d. e.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above ANSWER: b RATIONALE: Net profit per unit = $1.65 − $1.64 − $.03 = −$.02.

FEEDBACK: a. b. SOLUTION: Net profit per unit = $1.65  $1.64  $.03 = $.02. c. d. e.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives ANSWER: e RATIONALE: Net profit per unit = $.61 − $.58 − $.02 = $.01.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 36. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: a. −$.08. b. −$.03. c. $.05. d. $.08. e. none of the above ANSWER: c RATIONALE: Net profit per unit = $.64 + $.06 − $.69 = $.01.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: a. −$.08. b. −$.03. c. $.05. d. $.08. e. none of the above ANSWER: e RATIONALE: Net profit = $.78 + $.03 − $.86 = −$.05.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 38. European currency options can be exercised ____; American currency options can be exercised ____.

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Chapter 05: Currency Derivatives 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports. a. sell yen put options b. buy yen call options c. buy futures contracts on yen d. sell futures contracts on yen ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as: a. in the money. b. out of the money. c. at the money.

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Chapter 05: Currency Derivatives d. at a discount.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions? a. forward contracts b. futures contracts c. non-deliverable forward contracts d. options e. all of the above are instruments used to cover foreign currency positions.

ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures. a. sell; sell b. buy; sell c. sell; buy d. buy; buy ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency. a. buy; buy b. sell; buy c. buy; sell d. buy; buy ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 45. Which of the following would result in a profit on a euro futures contract when the euro depreciates? a. Buy a euro futures contract; sell a futures contract after the euro has depreciated. b. Sell a euro futures contract; buy a futures contract after the euro has depreciated. c. Buy a euro futures contract; buy an additional futures contract after the euro has depreciated d. None of the above would result in a profit when the euro depreciates.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 46. Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter. b. Similar to futures contracts, margin requirements are normally imposed on option traders. c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. d. Currency options can be classified as either put or call options. e. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally? a. $74,000. b. $84,000. c. $75,000 d. $85,000.

ANSWER: b RATIONALE: Dollars received from selling Canadian dollars in the spot market = C$100,000 × $.85 = $85,000. Premium paid for options = C$100,000 × $.01 = $1,000. Amount of dollars Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives received less premium = $84,000.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600. b. $46,900. c. $44,100. d. $36,400.

ANSWER: d RATIONALE: Dollars paid when exercising the option = £70,000 × $.50 = $35,000. Premium paid for options = £70,000 × $.02 = $1,400. Amount of dollars paid = $35,000 + $1,400 = $36,400.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 49. Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21.

Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. no; −$0.01. b. yes; $0.01. c. yes; −$0.01. d. yes; $0.03.

ANSWER: b RATIONALE: The net profit per unit is: $.21 − $.18 − $.02 = $.01.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 50. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? a. −$0.01.

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Chapter 05: Currency Derivatives b. $0.01. c. −$0.04. d. $0.04. e. −$0.03.

ANSWER: RATIONALE:

a The net profit per unit is $1.51 + $.02 − $1.54 = −$.01.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____. a. pay; 20,000 b. be paid; 20,000 c. pay; 2,000 d. be paid; 2,000 e. none of the above ANSWER: b RATIONALE: Amount received per unit = $.022 − $.02 = $.002 × THB10,000,0000 = $20,000.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying ANSWER: b POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives 53. A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a put option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 54. A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____. a. premium; about 6 percent b. discount; about 6 percent c. discount; about 6.45 percent d. premium; about 6.45 percent ANSWER: d RATIONALE: Premium = (Forward rate − Spot rate)/Spot rate = ($.66 − $.62)/$.62 = 6.45% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.

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Chapter 05: Currency Derivatives a. discount; 11.11 percent b. premium; 11.11 percent c. premium; 10.81 percent d. discount; 10.81 percent ANSWER: d Discount RATIONALE:

= [(FR − SR)/SR] × (360/90) = [($.36 − $.37)/$.37] × (360/90) = −10.81% (Discount)

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 57. Which of the following are most commonly traded on an exchange? a. forward contracts b. futures contracts c. currencies d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 58. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 59. Which of the following is true regarding the currency options market? a. Hedgers and speculators both use currency options to attempt to lower risk.

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Chapter 05: Currency Derivatives b. The currency options offered by commercial banks are more liquid and have a smaller bid/ask spread than the options traded on an exchange. c. When transaction costs are controlled for, the currency options market is efficient. d. all of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 60. The premium of a currency put option should increase if: a. the volatility of the underlying asset increases. b. the spot rate increases. c. A and B. d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 61. 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 exercised. d. More than one of these.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 62. 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 that expect to buy foreign currency to finance foreign subsidiaries. c. Corporations that expect to collect on a foreign account receivable in one month. d. all of the above ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 63. If you have bought the right to sell, you are a: a. call writer. b. put buyer. c. futures buyer. d. put writer.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 64. If you have an options position in which you might be obligated to buy euros, you are a: a. call writer. b. put writer. c. put buyer. d. futures seller.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 65. Which of the following is true for futures, but not for forwards? a. actual delivery b. no transactions costs c. self-regulating market d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Knowledge

66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now? a. $44,500. b. $45,000. c. $526 million. d. $47,500.

ANSWER: d RATIONALE: ¥5,000,000 × $.0095/¥ = $47,500 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____ percent. a. discount; −4.07 b. premium; 4.07 c. discount; −4.08 d. premium; 4.08 e. premium; 3.40 ANSWER: d RATIONALE: ($.59 − $.588)/$.588 × (360/30) = 4.08% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives 69. The price of a futures contract will generally vary significantly from that of a forward contract. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 70. If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Knowledge

73. Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 75. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 76. The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 77. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 78. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 79. Due to put-call parity, we can use the same formula to price calls and puts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 80. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 81. If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 83. If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 84. Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 85. A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 86. The highest amount a buyer of a call or a put option can lose is the exercise price. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 87. A straddle is a speculative strategy that involves the purchase of both a call and a put. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

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Chapter 05: Currency Derivatives a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 89. An option writer is the seller of a call or a put option. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 90. The forward premium is the price specified in a call or put option. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 91. The forward premium is the price specified in a call or put option. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

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Chapter 05: Currency Derivatives a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 93. Forward contracts are the best technique for managing exposure arising from project bidding. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 94. The currency futures markets are regulated by the International Monetary Fund. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 95. It is possible to have an opportunity loss when using futures to hedge. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 96. Margin is used in the forward market to mitigate default risk.

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Chapter 05: Currency Derivatives a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 97. There are no transactions costs associated with trading futures or options. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 98. Futures and options are available for cross rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 99. Options can be traded on an exchange or over the counter a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 100. The writer of an currency call option is obligated to buy the currency if the option is exercised.

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Chapter 05: Currency Derivatives a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 101. American-style options can be exercised any time up to maturity. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 102. If a currency put option is out of the money, then the present exchange rate is less than the strike price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 103. As mentioned in the text, the most common maturities for forward rates are: a. 30, 60, 90, 180, and 360 days. b. one, three, six, and twelve years. c. 5, 30, and 360 days. d. two, three, and five weeks ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives 104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro? a. 7.46 percent premium b. 7.46 percent discount c. 7.75 percent premium d. 7.75 percent discount ANSWER: c RATIONALE: [(F/S) − 1] × 360/180 = [($1.34/$1.29) − 1] × 360/180 = 7.75% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 106. The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25? a. $1.27 b. $1.34 c. $1.16 d. $1.23 ANSWER: a RATIONALE: $1.25 × [1 + 7%/(360/90)] = $1.27 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent. a. discount; 18.18 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives b. premium; 18.18 c. discount; 15.38 d. premium; 15.38 ANSWER: b RATIONALE: (F/S) − 1 = ($.013/$.011) − 1 = 18.18% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 108. The spot rate of the British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90day forward rate of the pound? a. $1.52 b. $1.61 c. $1.37 d. $1.46 ANSWER: d RATIONALE: $1.49 × (1 − .02) = $1.46 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 109. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.30; $1.30 b. $1.34; $1.30 c. $1.30; $1.34 d. $1.34; $1.34 ANSWER: d FEEDBACK: a. b. c. d. SOLUTION: Break-even point on call option to both the buyer and seller is $1.32 + $.02 = $1.34.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Application

110. The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro? a. $1.28 b. $1.30 c. $1.42 d. $1.16 ANSWER: b RATIONALE: $1.29 × [1+ 0.10/(360/30)] = $1.30 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 111. If you have a position where you might be obligated to sell pounds, you are: a. a call writer. b. a call buyer. c. a put writer. d. a put buyer.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 112. If you have bought a right to buy foreign currency, you are: a. a call writer. b. a call buyer. c. a put writer. d. a put buyer.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 113. The premium on a pound put option is $.04. The spot rate and the exercise price are $1.52. The spot rate at the time Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives of this option expiration is expected to be $1.51. Speculators could profit by: a. writing a put option. b. buying a put option. c. buying a call option d. writing a call option and buying a call option simultaneously.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 114. A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of the British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65 percent premium. Assume there are no transaction costs. What is the Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy? a. Buy a put option and receive $150,000. b. Sell pounds forward and receive $155,000. c. Sell a call option and receive $156,000. d. Sell a put option and receive $157,000.

ANSWER: b There are only two feasible choices for hedging in these circumstances: selling RATIONALE: pounds forward or buying a put option.

Sell pounds forward: One-year forward rate = $1.51 × (1 + .0265) = $1.55 Dollars received = 100,000 × $1.55 = $155,000 Buy put option: Amount received per unit = $1.54 − $.03 = $1.51 Total amount of receivables in U.S.$ = 100,000 × $1.51 = $151,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances? a. Purchase euro put options. b. Sell euros forward. c. Sell euro futures contracts. d. Sell euro put options.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 118. The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be. a. higher; less b. higher; more c. lower; less d. lower; more ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 119. The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be. a. higher; less b. higher; more c. lower; less d. lower; more ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 120. On January 1, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1, the Japanese firm informed Madison Co. that it wouldn’t be able to fulfill the order. The Japanese yen spot rate on February 1 is $.0087, and the 2-month forward rate exhibits a 3 percent discount. To offset its existing contract, Madison Co. will negotiate a forward contract to ____ for the date of April 1, and the profit/loss generated from this transaction is a ____ U.S. dollars. a. sell yen; gain of $60,000 b. sell yen; loss of $60,000 c. buy yen; gain of $30,000 d. to buy yen; loss of $30,000 ANSWER: b RATIONALE: 2-month forward rate = $.0087 × (1 − .03) = $.0084 Profit/loss from transaction = (100,000,000 × $.0084) − (100,000,000 × .009) = $60,000 loss.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 121. Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that the exercise prices of call and put options are the same. The most appropriate method for speculation is a ____and it may be achieved by ____. a. straddle; purchasing a put option and purchasing a call option. b. strangle; purchasing a put option and selling a call option.

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Chapter 05: Currency Derivatives c. strangle; selling a put option and selling a call option. d. straddle; selling a put option and purchasing a call option.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Analysis 122. Which of the following does not represent the risk from using forward contracts? a. A forward contract is used to hedge receivables, and the spot exchange rate at the expiration of the contract exceeds the contract price. b. A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price. c. A forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price. d. A forward contract is used to hedge payables or receivables and the amount to be received or paid is canceled.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 123. The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 124. A straddle can only be achieved if the exercise prices of put and call options are the same. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Knowledge

125. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 127. If a currency's forward rate exhibits a discount, the currency is forced to appreciate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 128. If a currency's forward rate exhibits a premium, that currency is forced to depreciate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Comprehension

129. If a currency call option is in the money, then the present exchange rate exceeds the strike price. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 130. If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 131. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 132. Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not convertible into dollars. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Knowledge

133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 135. A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures contracts. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 136. The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 137. A currency call option grants the right to sell a specific currency at a designated price within a specific time period. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 138. Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 139. When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 140. A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 141. Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 142. A straddle involves the purchase of either two call or two put options at the same exercise price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 144. Because constructing a long straddle in a foreign currency requires payment of two option premiums, the straddle becomes profitable only if the foreign currency appreciates or depreciates substantially.

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Chapter 05: Currency Derivatives a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 145. A contingency graph for the purchaser of a call option compares the price paid for the option to the payoffs received under various exchange rate scenarios. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 146. The choice of a basic versus a conditional option depends on expectations about the currency’s exchange rate over the period of concern. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 147. An advantage of a short straddle is that it provides the option writer with income from two separate sources. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives 148. The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 149. With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 150. A forward rate for a currency is said to exhibit a discount if: a. the forward rate exceeds the existing spot rate. b. the forward rate is less than the existing spot rate. c. the forward rate exceeds the expected future spot rate. d. the forward rate is less than the expected future spot rate. e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 151. If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____. a. 1.50 b. 1.47 c. 1.55 d. 1.46 e. None of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 152. Which of the following is not true regarding futures contracts? a. Unlike forward contracts, they are generally traded on an exchange. b. Futures contracts are standardized with respect to delivery date and size of the contract. c. There is an active over-the-counter market for currency futures contracts. d. Currency futures can be used by speculators who attempt to profit from exchange rate movements.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. a. upward; downward b. upward; upward c. downward; upward d. downward; downward ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 154. Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date. a. 39,062.50 b. 100,000 c. 48,000 d. 87,062.50 ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 155. Which of the following would result in a profit on a futures contract when the underlying currency depreciates? a. Buy a futures contract; sell a futures contract after the currency has depreciated. b. Sell a futures contract; buy a futures contract after the currency has depreciated. c. Buy a futures contract; buy an additional futures contract after the currency has depreciated. d. None of the above would result in a profit when the underlying currency of the futures contract depreciates.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. a. buy; buy b. sell; sell c. buy; sell d. sell; buy ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 157. Which of the following is true regarding options? a. Options are only traded over-the-counter. b. Speculators sell at-the-money put options when they expect that the currency’s value will rise. c. Speculators purchase at-the-money call options when they expect that the currency’s value will fall. d. Speculators sell at-the-money currency call options when they expect that the currency’s value will rise.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives KEYWORDS:

Bloom's: Comprehension

158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____. a. out of the money; in the money b. out of the money; out of the money c. in the money; in the money d. in the money; out of the money ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 159. When a currency call option is classified as "in the money," this indicates that a. the spot rate of the currency is less than the exercise price of the option. b. the spot rate of the currency is greater than the exercise price of the option. c. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid. d. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600 b. $46,900 c. $44,100 d. $36,400 ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Currency Derivatives 161. Which of the following is not true regarding options? a. The buyer of a call option has the right to buy the currency at the strike price. b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. c. The buyer of a put option has the right to sell the currency at the strike price. d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension

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Chapter 06: Government Influence on Exchange Rates 1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene. d. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. A weak dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S. ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 3. A strong dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S. ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. d. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system. a. floating rate; fixed rate b. floating rate; floating rate c. fixed rate; fixed rate d. fixed rate; floating rate ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates 7. A primary result of the Smithsonian Agreement was: a. the establishment of the European Monetary System (EMS). b. establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values. c. establishing specific rules for when tariffs and quotas could be imposed by governments. 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: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. Under a fixed exchange rate system: a. a foreign exchange market does not exist. b. central bank intervention in the foreign exchange market is not necessary. c. central bank intervention in the foreign exchange market is often necessary. d. central bank intervention in the foreign exchange market is not allowed.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar.

Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries. a. weakening; increase b. weakening; decrease c. strengthening; increase d. strengthening; decrease ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 10. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a: a. pegged system. b. fixed system.

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Chapter 06: Government Influence on Exchange Rates c. managed float system. d. crawling peg system.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 11. The interest rate of a country with a currency board: a. is less stable than it would be without a currency board. b. is typically below the interest rate of the currency to which it is tied. c. will move in tandem with the interest rate of the currency to which it is tied. d. is completely independent of the interest rate of the currency to which it is tied.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. The currency of Country X is pegged to the currency of Country Y. Assume that Country 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: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____. a. decrease; increase b. decrease; decrease c. increase; decrease Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates d. increase; increase ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 14. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of: a. pegged intervention. b. indirect intervention. c. nonsterilized intervention. d. sterilized intervention. e. A and D ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. Which of the following is an example of direct intervention in foreign exchange markets? a. lowering interest rates. b. increasing the inflation rate. c. exchanging dollars for foreign currency. d. imposing barriers on international trade.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 17. A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar. a. upward; upward b. downward; upward c. upward; downward d. downward; downward ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar'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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices. a. upward; downward; upward b. upward; downward; downward c. upward; upward; downward d. downward; upward; upward e. downward; downward; upward ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 20. The euro is the currency: a. adopted in all western European countries as of 1999. b. adopted in all eastern European countries as of 1999. c. adopted in all European countries as of 1999. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. The euro has not been adopted by: a. Slovenia. b. the U.K. c. Germany. d. France.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 22. The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries. a. Latin American b. European c. Asian d. North American ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 23. Countries that have adopted the euro must agree on a single ____ policy.

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Chapter 06: Government Influence on Exchange Rates a. monetary b. fiscal c. worker compensation d. foreign relations ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 24. Countries that have adopted the euro tend to have very similar ____. a. interest rates b. inflation rates c. income tax rates d. budget deficits ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 25. The risk-free interest rates among countries that have adopted the euro should: a. not necessarily be similar to risk-free rates in other countries. b. equal the U.S. risk-free rate. c. equal the risk-free rates in other European countries. d. equal the risk-free rates in Asian countries.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 26. Which of the following is true regarding the euro? a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. b. It allows for more consistent economic conditions across countries. c. It prevents each country from conducting its own monetary policy. d. All of the above are true.

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Chapter 06: Government Influence on Exchange Rates ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario? a. Weaken the dollar b. Strengthen the dollar c. Buy dollars with foreign currency in the foreign exchange market d. Implement a tight monetary policy ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? a. Sell dollars for foreign currency b. Buy dollars with foreign currency c. Lower interest rates d. None of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities. a. buy; sell b. sell; buy c. buy; buy d. sell; sell ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. As foreign exchange activity has grown, a given degree of central bank intervention has become: a. more effective. b. more frequent. c. less effective. d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. When using indirect intervention, a central bank is likely to focus on: a. inflation. b. interest rates. c. income levels. d. expectations of future exchange rates.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 32. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis? a. Thailand. b. Indonesia. c. Russia. d. China. e. Malaysia.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates 33. Which of the following is not true regarding Thailand? a. Thailand was one of the slowest growing countries before the Asian crisis. b. High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand's local interest rate. c. Thailand's baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors. d. Thai banks provided many loans that were very risky in their attempt to make use of all of their funds. e. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. China's yuan is presently: a. allowed to fluctuate freely without any central bank intervention. b. allowed to fluctuate but with central bank intervention. c. pegged to the dollar. d. pegged to the euro.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. During the period 1944-1971, the U.S. used a ____ system. a. euro exchange rate b. fixed c. dirty float d. flexible ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. Which of the following are examples of currency controls? a. import restrictions.

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Chapter 06: Government Influence on Exchange Rates b. prohibition of remittance of funds. c. ceilings on granting credit to foreign firms. d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. From a financial management perspective, which of the following is true regarding the introduction of the Euro? a. U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros. b. The euro is pegged to all other European currencies. c. Transactions costs decline for MNCs that conduct transactions within Europe. d. The euro replaced the British pound.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. Which of the following countries have not adopted the euro? a. Germany b. Italy c. Switzerland d. France ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. Which of the following are true about the Southeast Asian currency crisis? a. It was preceded by several years of large capital inflows to Asia. b. It was preceded by a five-year recession in Asia. c. Asian interest rates declined during the crisis. d. Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 42. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 45. The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 46. The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. The Asian crisis is generally believed to have started in Japan.

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Chapter 06: Government Influence on Exchange Rates a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on financial flows than the governments of other Asian countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 50. Market forces are the determinant of exchange rates in a freely floating exchange rate system. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 51. If a government wishes to stimulate its economy in the form of increased foreign demand for its country's products, it Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates could attempt to weaken its currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 52. In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 53. The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. The Fed's indirect method of intervention is to trade dollars for or against other currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates 55. China is commonly criticized for keeping the yuan's value at superficially high levels. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 56. The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 57. Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. The euro is pegged to other currencies of European countries that have not adopted the euro. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates KEYWORDS:

Bloom's: Knowledge

59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

63. All European countries now use the euro as their currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. A country with a currency board does not have control over its local interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. Dollarization refers to the replacement of local currency with U.S. dollars. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 66. A country with fixed exchange rates often faces constraints on growth. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

67. The Bretton Woods Agreement called for the establishment of a single European currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country's government breaks the peg and sets a new exchange rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 71. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 72. Which one of the following is a disadvantage of a fixed exchange rate system: a. Importers are insulated from the risk that the currency will appreciate over time. b. Management of an MNC is less difficult. c. The government might change the value of the currency. d. Exporters are insulated from the risk that the currency will depreciate over time.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent. a. 2.25 b. 6 c. 10 d. 8 ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 74. Which of the following did not occur as a result of Bretton Woods Agreement? a. Each currency was valued in terms of gold. b. Values of all currencies were fixed with respect to each other.

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Chapter 06: Government Influence on Exchange Rates c. Currencies were allowed to fluctuate no more than 1% above or below the initially set rates. d. The United States experienced no balance-of-trade deficits.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan. a. upward; reduce; unchanged b. upward; increase; higher c. downward; reduce; unchanged d. downward; increase; higher ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 76. Which one is not a disadvantage of a freely floating exchange rate system? a. It can adversely affect a country that has high unemployment. b. It can adversely affect a country that has high inflation. c. The government may intervene to change the value of a given currency. d. The exchange rate risk is high and may be costly to manage.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 77. A "dirty" float represents a system of: a. freely floating exchange rates. b. fixed exchange rates. c. floating exchange rates, but the central bank can manipulate the currency. d. fixed exchange rates, but the central bank can manipulate the currency.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.App. NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 80. The European Central Bank is located in: a. London. b. Denmark. c. Luxembourg. d. Frankfurt.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 81. Which of the following is not true regarding the eurozone? a. Members cannot set unique monetary policy individually.

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Chapter 06: Government Influence on Exchange Rates b. Members cannot apply their own fiscal policies. c. Members have to agree on the ideal monetary policy. d. Its creation allowed for greater political union among its members.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 83. Which of the following is not a reason for devaluation of a currency? a. high inflation. b. to reduce balance-of-trade deficit. c. to decrease the amount of imports. d. high unemployment.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 84. Which of the following is the most likely reason for revaluation of a currency? a. To reduce inflation. b. To stimulate the local economy. c. To increase the amount of exports. d. To increase balance-of-trade surplus.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities. a. buy; sell b. sell; sell c. sell; buy d. buy; sell ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should: a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.

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Chapter 06: Government Influence on Exchange Rates a. inward shift in demand for; outward shift in supply of b. inward shift in demand for; inward shift in supply of c. outward shift in supply of; outward shift in demand for d. outward shift in supply of; inward shift in demand for ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____. a. increases; appreciate; weaken b. decreases; appreciate; weaken c. increases; depreciate; strengthen d. decreases; appreciate; strengthen ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 91. A common way to reduce inflation is to weaken the value of the domestic currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention. a. purchase yen put options b. sell yen futures contracts c. purchase yen call options d. buy U.S. Treasury bonds ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention. a. purchase euro put options b. purchase euro futures contracts c. purchase yen call options d. sell U.S. Treasury bonds ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates in turn place ____ pressure on U.S. bond prices. a. downward; upward; upward b. downward; downward; upward c. upward; upward; downward d. upward; downward; upward ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 96. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates 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: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 98. Under the ____________ from 1979-1992 (before the euro existed), the currencies of many European countries were

currencies of most of these member countries were allowed to fluctuate by no more than 2.25 percent (6 percent for some currencies) from the initially established values. a. European Monetary System (EMS). b. snake agreement.

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Chapter 06: Government Influence on Exchange Rates c. Maastricht Treaty. d. Bretton Woods agreement.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 99. Direct intervention is usually more effective than indirect intervention. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates 102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 104. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 105. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 107. Using indirect intervention, the Fed attempts to affect the dollar's value indirectly by influencing the factors that determine it, such as interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 111. Which of the following is not true regarding the Mexican peso crisis? a. Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been. b. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico. c. In December of 1994, the central bank of Mexico allowed the peso to float freely. d. The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities. e. All of the above are true.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 112. Which of the following is true regarding the euro? a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. b. It allows for more consistent economic conditions across countries. c. It prevents each country from conducting its own monetary policy. d. All of the above are true.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 113. Among the reasons for government intervention are: a. to smooth exchange rate movement. b. to establish implicit exchange rate boundaries. c. to respond to temporary disturbances. d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 114. Which of the following is not true regarding government intervention? a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies. b. Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply. c. Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets. d. Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the factors that determine it, such as interest rates. e. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Government Influence on Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 07: International Arbitrage and Interest Rate Parity 1. 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. triangular arbitrage c. covered interest arbitrage d. locational arbitrage ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. Due to ____, market forces should realign the spot rate of a currency among banks. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. If interest rate parity exists, then ____ is not feasible. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage ANSWER: c DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 5. 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 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. When using ____, funds are not tied up for any length of time a. covered interest arbitrage b. locational arbitrage c. triangular arbitrage d. B and C ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. When using ____, funds are typically tied up for a significant period of time a. covered interest arbitrage b. locational arbitrage c. triangular arbitrage d. B and C ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X: a. should exhibit a discount. b. should exhibit a premium.

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Chapter 07: International Arbitrage and Interest Rate Parity c. should be zero (i.e., it should equal its spot rate). d. B or C ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 9. If the interest rate is higher in the United States than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then: 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: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 10. If the interest rate is lower in the United States 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 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 11. Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from this covered interest arbitrage activity? a. downward pressure on the euro's spot rate b. downward pressure on the euro's forward rate c. downward pressure on the U.S. interest rate d. upward pressure on the euro's interest rate ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity? a. upward pressure on the Swiss franc's spot rate b. upward pressure on the U.S. interest rate c. downward pressure on the Swiss interest rate d. upward pressure on the Swiss franc's forward rate ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur? a. Spot rate of peso increases; forward rate of peso decreases. b. Spot rate of peso decreases; forward rate of peso increases. c. Spot rate of peso decreases; forward rate of peso decreases. d. Spot rate of peso increases; forward rate of peso increases.

ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 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. $15,385 b. $15,625 c. $22,136 d. $31,250 ANSWER: a RATIONALE: $1,000,000/$.325 = NZ$3,076,923 × $.33 = $1,015,385. Thus, the profit is $15,385.

DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity 15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. 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 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound 90-day forward rate of pound 3-month deposit rate in United States 3-month deposit rate in Great Britain

= = = =

$1.30 $1.28 3% 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,024,000. b. $1,030,000. c. $1,040,000. d. $1,034,000. e. none of the above ANSWER: a RATIONALE: $1,000,000/$1.30 = 769,231 pounds × (1.04) = 800,000 pounds × 1.28 = $1,024,000 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 17. Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then: a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. c. U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States. d. U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Application

18. Assume the following information: Current spot rate of New Zealand dollar Forecasted spot rate of New Zealand dollar 1 year from now One-year forward rate of the New Zealand dollar Annual interest rate on New Zealand dollars Annual interest rate on U.S. dollars

= = = = =

$.41 $.43 $.42 8% 9%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63 ANSWER: e RATIONALE: $500,000/$.41 = NZ$1,219,512 × (1.08) = NZ$1,317,073 × .42 = $553,171 Yield = ($553,171 − $500,000)/$500,000 = 10.63% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 19. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs: a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 20. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity started with? a. $11,764. b. −$11,964. c. $36,585. d. $24,390. e. $18,219.

ANSWER: RATIONALE:

d $1,000,000/$.41 = S2,439,024 × $.42 = $1,024,390 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 21. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign 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: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. a. appreciate; depreciate b. depreciate; appreciate c. depreciate; depreciate d. appreciate; appreciate e. remain stable; appreciate ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 23. Assume the following information: Spot rate today of Swiss franc 1-year forward rate as of today for Swiss franc Expected spot rate 1 year from now Copyright Cengage Learning. Powered by Cognero.

= = =

$.60 $.63 $.64 Page 7

Chapter 07: International Arbitrage and Interest Rate Parity Rate on 1-year deposits denominated in Swiss francs Rate on 1-year deposits denominated in U.S. dollars

= =

7% 9%

From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent. a. 5.00 b. 12.35 c. 15.50 d. 14.13 e. 11.22 ANSWER: b RATIONALE: $1,000,000/$.60 = SF1,666,667 × (1.07) = SF1,783,333 × $.63 = $1,123,500 Yield = ($1,123,500 − $1,000,000)/$1,000,000 = 12.35% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 24. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S $ = $.32 Exchange rate of pound in U.S.$ = $1.50 Exchange rate of pound in Singapore dollars = S$4.50 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate ANSWER: d DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 25. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds? a. 2.0. b. 2.40.

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Chapter 07: International Arbitrage and Interest Rate Parity c. .80. d. .50. e. none of the above ANSWER: d $.80/$1.60 = 0.50 RATIONALE: DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 26. Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true? a. Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage. b. Americans who invest in the United States earn the same rate of return as Germans who attempt covered interest arbitrage. c. Americans who invest in the United States earn the same rate of return as Germans who invest in Germany d. A and B e. None of the above ANSWER: e DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 27. Assume the U.S. interest rate is 2 percentage points higher than the Swiss rate, and the forward rate of the Swiss franc has a 4 percent premium. Given this information: a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland. b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the United States. c. A and B d. none of the above ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 28. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate and ____ pressure on the pound's forward rate. a. downward; downward Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity b. downward; upward c. upward; downward d. upward; upward ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. Assume that interest rate parity holds, and the euro's interest rate is 9 percent while the U.S. interest rate is 12 percent.

Then the euro's interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity. a. discount; increase b. discount; decrease c. premium; increase d. premium; decrease ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 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. $7,067 b. $8,556 c. $10,114 d. $12,238 ANSWER: a RATIONALE: $1,000,000/$.566 = SF1,766,784 × $.57 = $1,007,067. Thus, the profit is $7,067.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 31. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound 90-day forward rate of pound 3-month deposit rate in U.S. 3-month deposit rate in U.K.

= = = =

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$1.60 $1.57 3% 4% Page 10

Chapter 07: International Arbitrage and Interest Rate Parity If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,020,500 b. $1,045,600 c. $1,073,330 d. $1,094,230 e. $1,116,250 ANSWER: a RATIONALE: $1,000,000/$1.60 = 625,000 pounds × (1.04) = 650,000 pounds × 1.57 = $1,020,500 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 32. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks 1-year deposit rate offered on Swiss francs 1-year forward rate of Swiss francs Spot rate of Swiss franc

= = = =

12% 10% $.62 $.60

Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

ANSWER: b RATIONALE: $1,000,000/$.60 = SF1,666,667 × (1.1) = SF1,833,333 × $.62 = $1,136,667 Yield = ($1,136,667 − $1,000,000)/$1,000,000 = 13.7% This yield exceeds what is possible domestically.

DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 33. Assume the following information: Current spot rate of Australian dollar Forecasted spot rate of Australian dollar 1 year from now 1-year forward rate of Australian dollar Annual interest rate for Australian dollar deposit Copyright Cengage Learning. Powered by Cognero.

= = = =

$.64 $.59 $.62 9% Page 11

Chapter 07: International Arbitrage and Interest Rate Parity Annual interest rate in the United States

=

6%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59 ANSWER: e $500,000/$.64 RATIONALE: = A$781,250 × (1.09) = A$851,563 × $.62 = $527,969 Yield = ($527,969 − $500,000)/$500,000 = 5.59% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 34. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63 Bank D $1.58 $1.60 As locational arbitrage occurs: a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase. b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 35. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 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. $16,393 e. $18,219 ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity RATIONALE:

$1,000,000/$.61 = A$1,639,344 × $.62 = $1,016,393. Thus, the profit is $16,393.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 36. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S $ = $.60 Exchange rate of pound in U.S.$ = $1.50 Exchange rate of pound in Singapore dollars = S$2.6 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate ANSWER: b DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 37. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage? a. $2,041,667 b. $9,804 c. $500 d. $1,639 ANSWER: d RATIONALE: $500,000/$.305 = MYR1,639,344 × $.306 = $501,639. Thus, the profit is $1,639.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application

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Chapter 07: International Arbitrage and Interest Rate Parity 38. Which of the following is an example of triangular arbitrage initiation? a. buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20 c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20 d. converting funds to a foreign currency and investing the funds overseas ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 39. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht? a. A$39.93 b. A$25,043.48 c. A$553.00 d. none of the above ANSWER: a RATIONALE: $.023/$.576 × THB1,000 = A$39.93.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 40. National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $.55 $.56 Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? a. $77.64 b. $197.53 c. $15.43 d. $111.80 ANSWER: RATIONALE:

c $10,000/$1.62

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= £6,172.84 × 2.95 = NZ$18,209.88 × $.55 Page 14

Chapter 07: International Arbitrage and Interest Rate Parity = $10,015.43.

Thus, the profit is $15.43.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 41. Assume the following information: You have $900,000 to invest: Current spot rate of Australian dollar (A$) 180-day forward rate of the Australian dollar 180-day interest rate in the United States 180-day interest rate in Australia

= = = =

$.62 $.64 3.5% 3.0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? a. $56,903 b. $61,548 c. $27,000 d. $31,500 ANSWER: a RATIONALE: $900,000/$.62 = A$1,451,612 × (1.03) = A$1,495,161 × $.64 = $956,903. Thus, the profit is $56,903.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Assume the following information: You have $300,000 to invest: The spot bid quote for the euro (€) is $1.08 The spot ask quote for the euro is $1.10 The 180-day forward rate (bid) of the euro is $1.08 The 180-day forward rate (ask) of the euro is $1.10 The 180-day interest rate in the United States is 6% The 180-day interest rate in Europe is 8% 42. Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have after 180 days? a. $318,109.10 b. $330,000.00 c. $312,218.20 d. $323,888.90 e. none of the above ANSWER: a RATIONALE: $300,000/$1.10 = €277,777.80 × (1.08) Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity = €294,444.40 × $1.08 = $318,109.10 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 43. Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation? a. 7.96 percent; feasible b. 6.04 percent; feasible c. 6.04 percent; not feasible d. 4.07 percent; not feasible e. 10.00 percent; feasible ANSWER: b RATIONALE: $318,109.10/$300,000 − 1 = 6.04%. Since this rate is slightly higher than the U.S. interest rate of 6%, covered interest arbitrage is feasible.

DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 44. According to interest rate parity (IRP): a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 45. Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent.

Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____. a. premium; increase b. discount; decrease c. discount; increase Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity d. premium; decrease ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 46. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 47. For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 50. The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 51. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 55. If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 56. If interest rate parity (IRP) exists, then triangular arbitrage will not be possible. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 57. Forward rates are driven by the government rather than market forces a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

58. Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 59. The yield curve of every country has its own unique shape a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks 1-year deposit rate offered on British pounds 1-year forward rate of Swiss francs Spot rate of Swiss franc

= = = =

10% 13.5% $1.26 $1.30

Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

ANSWER: a RATIONALE: $1,000,000/$1.30 = 793,651 pounds × (1.135) = 900,794 × $1.26 = $1,100,076.

Yield: ($1,100,076 − $1,000,000)/($1,000,000) = 10%.

DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Analysis

61. If quoted exchange rates are the same across different locations, then ____ is not feasible. a. triangular arbitrage b. covered interest arbitrage c. locational arbitrage d. A and C ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 62. Points above the IRP line represent situations where: a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically. b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. d. covered interest arbitrage is feasible for neither domestic nor foreign investors.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 63. Points below the IRP line represent situations where: a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically. b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. d. covered interest arbitrage is feasible for neither domestic nor foreign investors.

ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 64. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

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Chapter 07: International Arbitrage and Interest Rate Parity a. transaction costs b. political risk c. differential tax laws d. all of the above ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent.

The forward rate on British pounds exhibits a ____ of ____ percent. a. discount; 2.73 b. premium; 2.73 c. discount; 3.65 d. premium; 3.65 ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 66. Assume the following information: Exchange rate of Japanese yen in U.S.$ Exchange rate of euro in U.S.$ Exchange rate of euro in Japanese yen

= = =

$.011 $1.40 140 yen

What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage? a. $100,000 b. −$90,909 c. 10 percent d. −9.09 percent ANSWER: c Exchange dollars for euros = $1,000,000/$1.4 = 714.286; exchange euros for RATIONALE: yen = 714,286 × 140 = 100,000,000 yen. Exchange yen for dollars = 100,000,000 yen × $.011 = $1,100,000. Yield = ($1,100,000 − $1,000,000)/$1,000,000 = 10% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity 67. Assume the following information: Value of an Australian dollar (A$) in $ Value of Mexican peso in $ Value of an Australian dollar in Mexican pesos

Quoted Bid Price $0.67 $.074

Quoted Ask Price $0.69 $.077

8.2

8.5

Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy? a. $6,133 b. $2,368 c. $6,518 d. $13,711 ANSWER: b RATIONALE: $100,000/$.077 = 1,298,701 pesos/8.5 = A$152,788 × $0.67 = $102,368 Profit = $102,368 − $100,000 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 68. The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 69. The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent.

Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 70. Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 71. Triangular arbitrage involves 3 transactions that must be executed at a single bank. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 72. Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 73. Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 74. The yield curve for the United States normally has an upward slope, meaning that the annualized interest rate is higher for longer terms to maturity a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 75. Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 76. From the U.S. perspective, an example of a cross exchange rate is the exchange rate between a non-U.S. country and the U.S. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 77. The word “covered” in “covered interest arbitrage” refers to the investors hedging their position to protect against the possibility of default risk. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 78. The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP). a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 79. Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 80. Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 81. The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 82. The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

83. For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 84. If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 85. If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 86. Which of the following is not mentioned in the text as a form of international arbitrage? a. Locational arbitrage b. Triangular arbitrage c. Transactional arbitrage d. Covered interest arbitrage e. All of the above are mentioned in the text as forms of international arbitrage.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: International Arbitrage and Interest Rate Parity STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

87. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve: a. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. d. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. e. Locational arbitrage is not possible in this case.

ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 88. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it.

Because of your and other arbitrageurs' actions, the following adjustments must take place. a. One bank's ask price will rise, and the other bank's bid price will fall. b. One bank's ask price will fall, and the other bank's bid price will rise. c. One bank's bid/ask spread will widen, and the other bank's bid/ask spread will fall. d. A and C ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 89. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian dollar (C$) of $0.821.

The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage? a. $6,053.27 b. $5,030.45 c. $6,090.13 d. Triangular arbitrage is not possible in this case.

ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 90. Which of the following is not true regarding covered interest arbitrage?

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Chapter 07: International Arbitrage and Interest Rate Parity a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. d. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. e. All of the above are true regarding covered interest arbitrage.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 91. Which of the following is not true regarding covered interest arbitrage? a. Covered interest arbitrage is a reason for observing interest rate parity (IRP). b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country. c. When interest rate parity holds, covered interest arbitrage is not possible. d. When interest rate disparity exists, covered interest arbitrage may not be profitable. e. All of the above are true.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 92. Which of the following is not true regarding interest rate parity (IRP)? a. When interest rate parity holds, covered interest arbitrage is not possible. b. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount. c. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium. d. When covered interest arbitrage is not feasible, interest rate parity must hold. e. All of the above are true.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates 1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken. b. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken. c. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen. d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that: a. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate. b. the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. c. the home currency will appreciate 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 inflation rate.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. The international Fisher effect (IFE) suggests that the foreign currency will appreciate when: a. the current home nominal interest rate exceeds the current foreign nominal interest rate. b. the current home real interest rate exceeds the current foreign real interest rate. c. the current home inflation rate exceeds the current foreign nominal interest rate. d. the current foreign inflation rate exceeds the current home inflation rate.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will: a. reduce the probability that PPP will hold. b. increase the probability that PPP will hold. c. increase the probability the IFE will hold.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates d. B and C ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 5. Because there are sometimes no substitutes for traded goods, this will: a. reduce the probability that PPP will hold. b. increase the probability that PPP will hold. c. increase the probability the IFE will hold. d. B and C ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 6. According to the IFE, if British interest rates exceed U.S. interest rates: a. the British pound's value will remain constant. b. the British pound will depreciate against the dollar. c. the British inflation rate will decrease. d. the forward rate of the British pound will contain a premium. e. today's forward rate of the British pound will equal today's spot rate.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that: a. the nominal interest rates of both countries are the same. b. the inflation rates of both countries are the same. c. the exchange rates of both countries will move in a similar direction against other currencies. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. Given a home country and a foreign country, purchasing power parity suggests that: a. the inflation rates of both countries will be the same. b. the nominal interest rates of both countries will be the same. c. A and B d. none of the above ANSWER: d 5% + 3% = 8% RATIONALE: POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold: a. the value of the euro would often appreciate against the dollar. b. the value of the euro would often depreciate against the dollar. c. the value of the euro would remain constant most of the time. d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 10. If the international Fisher effect (IFE) did not hold based on historical data, this would suggest that: a. some corporations with excess cash could lock in a guaranteed higher return on future foreign short-term investments. b. some corporations with excess cash could have generated profits on average from covered interest arbitrage. c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments. d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 11. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and: a. the income differential. b. the forward discount or premium. c. the inflation differential. d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 12. According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be: a. 2 percent. b. 3 percent. c. −2 percent. d. 5 percent. e. 8 percent.

ANSWER: e 5% + 3% = 8% RATIONALE: POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 13. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: a. follows their exchange rate movement. b. is due to their inflation differentials. c. is zero. d. is constant over time. e. C and D ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 14. Assume that U.S. and British investors require a real return of 2 percent. If the nominal U.S. interest rate is 15 percent, and the nominal British rate is 13 percent, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____. a. 2 percentage points above; depreciate by about 2 percent b. 3 percentage points above; depreciate by about 3 percent c. 3 percentage points below; appreciate by about 3 percent d. 3 percentage points below; depreciate by about 3 percent e. 2 percentage points below; appreciate by about 2 percent ANSWER: e POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 15. Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____. a. appreciate; 3 percent b. appreciate; 1 percent c. depreciate; 3 percent d. depreciate; 2 percent e. appreciate; 2 percent ANSWER: e POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 16. Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar. a. lower U.S. inflation; depreciate b. lower U.S. inflation; appreciate c. higher U.S. inflation; depreciate d. higher U.S. inflation; appreciate Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 17. According to the international Fisher effect, if Venezuela has a much higher nominal interest rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____. a. lower; strengthen b. lower; weaken c. higher; weaken d. higher; strengthen ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 18. If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect. a. greater than b. less than c. equal to d. answer is dependent on whether the forward rate has a discount or premium ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. The Fisher effect is used to determine the: a. real inflation rate. b. real interest rate. c. real spot rate. d. real forward rate.

ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 20. Latin American countries have historically experienced relatively high inflation, and their currencies have weakened.

This information is somewhat consistent with the concept of: a. interest rate parity. b. locational arbitrage. c. purchasing power parity. d. the exchange rate mechanism.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. The inflation rate in the United States is 3 percent while the inflation rate in Japan is 10 percent. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen have adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be: a. $0.0076. b. $0.0073. c. $0.0070. d. $0.0066.

ANSWER: c RATIONALE: (1.03/1.10) × $.0075 = $.0070 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 22. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States.

According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$). a. reduce; increase; appreciation b. increase; reduce; appreciation c. reduce; increase; depreciation d. reduce; increase; appreciation ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 23. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 2. Therefore: a. purchasing power parity holds. b. purchasing power parity overestimated the exchange rate change during the period under examination. c. purchasing power parity underestimated the exchange rate change during the period under examination. d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. Which of the following is indicated by research regarding purchasing power parity (PPP)? a. PPP clearly holds in the short run. b. Deviations from PPP are less pronounced in the long run. c. PPP clearly holds in the long run. d. There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 25. If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then the British pound (£) is expected to ____ by about ____percent, according to the international Fisher effect (IFE). a. depreciate; 2.9 b. appreciate; 2.9 c. depreciate; 1.0 d. appreciate; 1.0 e. none of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates ANSWER: b RATIONALE: (1.06/1.03) − 1 = 2.9%.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 26. There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 27. Which of the following is not true regarding IRP, PPP, and the IFE? a. IRP suggests that a currency's spot rate will change according to interest rate differentials. b. PPP suggests that a currency's spot rate will change according to inflation differentials. c. The IFE suggests that a currency's spot rate will change according to interest rate differentials. d. All of the above are true.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates KEYWORDS:

Bloom's: Knowledge

29. According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. Research indicates that deviations from purchasing power parity (PPP) are less pronounced over the long run. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 31. The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 32. If the IFE theory holds, that means that covered interest arbitrage is not feasible. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

33. If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts, and those currencies would be expected to depreciate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 34. Interest rate parity can only hold if purchasing power parity holds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: INFM.MADU.15.08.04 LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. If interest rate parity holds, then the international Fisher effect must hold. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries? a. purchasing power parity (PPP) b. triangular arbitrage c. international Fisher effect (IFE) d. interest rate parity (IRP) ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries? a. purchasing power parity (PPP) b. triangular arbitrage c. international Fisher effect (IFE) d. interest rate parity (IRP) ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. Which of the following theories can be assessed using data that exists at one specific point in time? a. purchasing power parity (PPP) b. international Fisher effect (IFE) c. A and B d. interest rate parity (IRP) ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries? a. absolute form of PPP b. relative form of PPP c. international Fisher effect (IFE) d. interest rate parity (IRP) ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

40. The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

Regression results indicate that a0 = 0 and a1 = 1. Therefore: a. purchasing power parity holds. b. purchasing power parity overestimated the exchange rate change during the period under examination. c. purchasing power parity underestimated the exchange rate change during the period under examination. d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

ANSWER: a POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent.

According to the international Fisher effect, the British pound's spot exchange rate should ____ by about ____ over the year. a. depreciate; 1.9 percent b. appreciate; 1.9 percent c. depreciate; 3.94 percent d. appreciate; 3.94 percent ANSWER: b RATIONALE: (1 + .07)/(1 + .05) − 1 = 1.9% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 42. According to the international Fisher effect (IFE): a. the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment. b. the exchange rate–adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment. c. the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate. d. the percentage change in the foreign spot exchange rate will be negative if the foreign interest rate is lower Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates than the local interest rate.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 43. Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40.

What will be the yield on your investment if you invest in euros? a. 8 percent b. 5 percent c. 3 percent d. 2.78 percent ANSWER: b POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 44. Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 6 percent b. 3 percent c. 4 percent d. 2 percent ANSWER: c RATIONALE: (1 + .05)/(1 + .07) × $0.689 = $0.676. ($100,000/A$0.689) × (1 + .06) = A$153,846 × $0.676 = $104,000. ($104,000 − $100,000)/$100,000 = 4% POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 45. Assume that the international Fisher effect (IFE) holds between the United States and the United Kingdom. The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7 percent, and the U.S. interest rate is 7 percent. What does this say about real interest rates expected by British investors?

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates a. Real interest rates expected by British investors are equal to the interest rates expected by U.S. investors. b. Real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors. c. Real interest rates expected by British investors are 2 percentage points above the real interest rates expected

by U.S. investors. d. IFE doesn't hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 46. The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 47. If purchasing power parity holds, then the Fisher effect must also hold. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Assume that inflation in the United States is expected to be 9 percent, while inflation in Australia is expected to be 5 percent over the next year. Today you receive an offer to purchase a one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer. a. True b. False ANSWER: b RATIONALE: Spot rate in a year = (1.09/1.05) × $0.70 = $0.73 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 50. Assume that the interest rate offered on pounds is 5 percent and the pound is expected to depreciate by 1.5 percemt.

For the international Fisher effect (IFE) to hold between the United Kingdom and the United States, the U.S. interest rate should be ____. a. 3.43 percent b. 5.68 percent c. 6.5 percent d. 7.3 percent ANSWER: a RATIONALE: (1 + .05) × (1 + .015) − 1 = 3.43% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 51. Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

52. The nominal interest rate can be measured as the real interest rate minus the expected inflation rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country, and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 54. According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 55. The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be a. $0.0078. b. $0.0082. c. $0.0111.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates d. $0.00492. e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 56. Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States.

According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$). a. reduce; increase; appreciation b. increase; reduce; depreciation c. reduce; increase; depreciation d. reduce; increase; appreciation ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 57. The following regression was conducted for the exchange rate of the British pound (BP):

Regression results indicate that a0 = 0 and a1 = 2. Therefore, a. purchasing power parity holds. b. purchasing power parity overestimated the exchange rate change during the period under examination. c. purchasing power parity underestimated the exchange rate change during the period under examination. d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 58. Among the reasons that purchasing power parity (PPP) does not consistently occur are: a. exchange rates are affected by interest rate differentials.

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Chapter 08: Relationships among Inflation, Interest Rates, and Exchange Rates b. exchange rates are affected by national income differentials and government controls. c. supply and demand may not adjust if no substitutable goods are available. d. all of the above are reasons that PPP does not consistently occur.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 59. Which of the following is not true regarding limitations of PPP and the IFE? a. A limitation of the IFE is that the determination of the expected inflation rate is subject to error. b. A limitation in testing PPP is that the results will vary with the base period used. c. A limitation of the PPP and the IFE (because it relies on the PPP) is that other country characteristics besides inflation can affect exchange rate movements. d. All of the above are true.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 09: Forecasting Exchange Rates 1. Which of the following forecasting techniques would be most likely to use today's forward exchange rate to forecast the future exchange rate? a. fundamental forecasting b. market-based forecasting c. technical forecasting d. interval forecasting ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 2. Which of the following forecasting techniques would be most likely to use today's spot exchange rate of the euro to forecast the euro's future exchange rate? a. fundamental forecasting b. market-based forecasting c. technical forecasting d. mixed forecasting ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. Which of the following forecasting techniques would be most likely to use relationships between economic factors and exchange rate movements to forecast the future exchange rate? a. fundamental forecasting b. market-based forecasting c. technical forecasting d. mixed forecasting ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 4. Which of the following forecasting techniques would be most likely to use the historical exchange rate data for the euro to predict the euro's future exchange rate? a. fundamental forecasting Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates b. market-based forecasting c. technical forecasting d. mixed forecasting ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. If a particular currency is consistently declining substantially over time, then a market-based forecast of a currency in a developed country 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. Which of the following is true regarding forecast errors? a. Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency. b. Potential forecast errors may vary depending on the time horizon, the currency’s volatility, and whether the country issuing the currency is experiencing political problems. c. Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries. d. B and C ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 7. If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements. a. technical forecast technique Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates b. fundamental forecast technique c. all of the above d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. Which of the following is true? a. Forecast errors cannot be negative. b. Forecast errors are negative when the forecasted rate exceeds the realized rate. c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate. d. None of the above.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. Which of the following is true according to the text? a. The forecast bias of a currency rarely shifts over time. b. The absolute forecast error as a percentage 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 10. A fundamental forecast that uses multiple values of the influential factors is an example of: a. sensitivity analysis. b. discriminant analysis. c. technical analysis. d. factor analysis.

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Chapter 09: Forecasting Exchange Rates POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 11. When the value of an influential factor from the prior period affects the forecast in the future period, this is an example of a(n): a. lagged input. b. instantaneous input. c. simultaneous input. d. B and C ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 12. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate.

Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true? a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable. b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate. d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. Which of the following is not a limitation of fundamental forecasting? a. uncertain timing of impact of some factors b. forecasts needed for factors that have a lagged impact c. omission of other relevant factors from the model d. possible change in sensitivity of the forecasted variable to each factor over time Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 14. Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican fiveyear interest rate is 8 percent annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast? a. $.131 b. $.226 c. $.262 d. $.140 e. $.174 ANSWER: a RATIONALE: (1.05)5/(1.08)5 − 1 = −13%; $.20[1 + (−13%)] = $.174 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 15. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is: a. $.860. b. $.848. c. $.740. d. $.752.

ANSWER: d RATIONALE: $.80 × [1 + (−6%)] = $.752 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 16. If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all relevant private information, then ____ would be refuted. a. weak-form efficiency b. semistrong-form efficiency Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates c. strong-form efficiency d. A and B e. B and C ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 17. According to the text, research generally supports ____ in foreign exchange markets. a. weak-form efficiency b. semistrong-form efficiency c. strong-form efficiency d. A and B e. B and C ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of: a. depreciation in the Australian dollar's value over the next year. b. appreciation in the Australian dollar's value over the next year. c. no change in the Australian dollar's value over the next year. d. information on future interest rates is needed to answer this question.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 19. If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. covered interest arbitrage is feasible. b. the international Fisher effect (IFE) is supported. c. the international Fisher effect (IFE) is refuted.

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Chapter 09: Forecasting Exchange Rates d. the average absolute error from forecasting would equal zero.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 20. Which of the following is not a forecasting technique mentioned in your text? a. accounting-based forecasting b. technical forecasting c. fundamental forecasting d. market-based forecasting ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. The following regression model was estimated to forecast the value of the Indian rupee (INR): INRt = a0 + a1INTt + a2INFt − 1 + µt, where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the United States and India, and INF is the inflation rate differential between the United States and India in the previous period.

Regression results indicate coefficients of a0 = .003; a1 = −.5; and a2 = .8. Assume that INFt − 1 = 2 percent. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution: Probability 30% 40% 30%

Possible Outcome −2% −3% −4%

The expected change in the Indian rupee in period t is: a. 3.40 percent. b. 0.40 percent. c. 3.10 percent. d. 1.70 percent. e. none of the above ANSWER: a RATIONALE: E[INTt] = (−.02)(.3) + (−.03)(.4) + (−.04)(.3) = −3.00% INRt = .003 + (−.5)(−.03) + (.8)(.02) = 3.40% Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 22. Gamma Corp. has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts are biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft − 1 + µt, where St is the spot rate of the pound in year t and Ft −1 is the forward rate of the pound in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate. a. overestimated b. underestimated c. correctly estimated d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 23. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 24. If a foreign currency is expected to ____ substantially against the parent's currency, the parent may prefer to ____ the remittance of subsidiary earnings. a. weaken; delay b. weaken; expedite c. appreciate; expedite d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 25. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____. a. appreciate; depreciate b. appreciate; appreciate c. depreciate; depreciate d. depreciate; appreciate ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 26. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____. a. depreciate by .8 percent; today b. depreciate by .8 percent; tomorrow c. appreciate by .8 percent; today d. appreciate by .8 percent; tomorrow ANSWER: b RATIONALE: et + 1 = (2%) × (−40%) = −0.8% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 27. Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 28.

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro: eurot = b0 + b1INFt − 1 + b2INCt − 1 = .005 + .9INFt − 1 + 1.1INCt − 1 The most recent quarterly percentage change in the inflation differential between the United States and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the United States and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____ percent. a. appreciation; 3.4 b. depreciation; 3.4 c. appreciation; 0.7 d. appreciation; 1.2 ANSWER: d RATIONALE: eurot = .005 + .9(.02) + 1.1(−.01) = 1.2% POINTS: 1 DIFFICULTY: Moderate NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 29. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____. a. 1.02 b. 1.03 c. 1.04 d. none of the above ANSWER: c RATIONALE: E(St + 1) = $1.03(1.0097) = $1.04 POINTS:

1

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Chapter 09: Forecasting Exchange Rates DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 30. If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____ percent. a. 1.90 b. 2.00 c. −1.87 d. none of the above ANSWER: a RATIONALE: E(e) = 1.07/1.05 − 1 = 1.90% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 31. If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries. a. spot; high b. spot; low c. forward; high d. forward; low ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and the spot rate will provide ____ forecasts. a. substantial; similar b. substantial; very different c. close to zero; similar d. close to zero; very different ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting. a. technical b. fundamental c. market-based d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____ percent. a. 9.6 b. −9.6 c. 8.8 d. −8.8 ANSWER: c RATIONALE: POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 35. The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____. a. lower; volatile b. higher; stable c. lower; stable d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements. a. weak-form b. semistrong-form c. strong-form d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. Foreign exchange markets are generally found to be at least ____ efficient. a. weak-form b. semistrong-form c. strong form d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 38. MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. If the pattern of currency values over time appears random, then technical forecasting is appropriate. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. Inflation and interest rate differentials between the United States and foreign countries are examples of variables that could be used in fundamental forecasting. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 41. A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 42. The most sophisticated forecasting techniques provide consistently accurate forecasts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates the same amount as the forward premium or discount, respectively. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 45. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 46. The closer graphical points are to the perfect forecast line, the better the forecast. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 47. Foreign exchange markets appear to be strong-form efficient. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Two methods for assessing exchange rate volatility are to use the volatility of historical exchange rate movements and to derive the exchange rate's implied standard deviation from the currency option pricing model. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 50. Market-based forecasting involves the use of historical exchange rate data to predict future values. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 51. Fundamental models examine moving averages over time and thus allow the development of a forecasting rule. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 55. If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today's exchange rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 56. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 57. The potential forecast error is larger for currencies that are more volatile. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates KEYWORDS:

Bloom's: Knowledge

59. In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. Monson Co., based in the United States, exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments. a. higher; to hedge b. lower; not to hedge c. higher; not to hedge d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 61. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 62. Which of the following is not a limitation of technical forecasting? a. It's not suitable for long-term forecasts of exchange rates. b. It doesn't provide point estimates or a range of possible future values. c. It cannot be applied to currencies that exhibit random movements. d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecasts.

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Chapter 09: Forecasting Exchange Rates ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 63. The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD): AUDt = a0 + a1INTt + a2INFt − 1 + µt, where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = −.8; and a2 = .5. Assume that INFt − 1 = 4%.

However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution: Probability 20% 80%

Possible Outcome −3% −4%

There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____. a. 4.5 percent; 6.1 percent b. 6.1 percent; 4.5 percent c. 4.5 percent; 5.3 percent d. none of the above ANSWER: c RATIONALE: Probability 20% = .001 + (−.8)(−.03) + (.5)(.04) = 4.5% Probability 80% = .001 + (−.8)(−.04) + (.5)(.04) = 5.3% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 64. Purchasing power parity is used in: a. technical forecasting. b. fundamental forecasting. c. market-based accounting. d. all of the above.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate. a. higher; buy; upward b. higher; sell; downward c. higher; sell; upward d. lower; buy; upward ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 66. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate. a. lower; sell; upward b. lower; sell; downward c. higher; sell; upward d. higher; sell; downward ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 67. Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of: a. appreciation of yen's value over the next year. b. depreciation of yen's value over the next year. c. no change in yen's value over the next year. d. information about interest rates is needed to answer this question.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

68. Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of: a. appreciation of the pound's value over the next year. b. depreciation of the pound's value over the next year. c. no change in the pound's value over the next year. d. not enough information to answer this question.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 69. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements. a. weak-form b. semistrong-form c. strong-form d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 70. If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is: a. weak-form efficient. b. semistrong-form efficient. c. strong-form efficient. d. all of the above.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 71. Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft − 1 + µt, where St is the spot rate of the yen in year t and Ft − 1 is the forward rate of the yen in year t − 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate. a. overestimated b. underestimated c. correctly estimated d. none of the above ANSWER: a RATIONALE: {[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]} × $.84 = $.856 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 72. Assume that U.S. interest rates for the next three years are 5 percent, 6 percent, and 7 percent, respectively. Also assume that Canadian interest rates for the next three years are 3 percent, 6 percent, and 9 percent. The current Canadian spot rate is $.840. What is the approximate three-year forecast of the Canadian dollar’s spot rate if the three-year forward rate is used as a forecast? a. $.840 b. $.890 c. $.856 d. $.854 ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 73. Which of the following is not one of the major reasons for MNCs to forecast exchange rates? a. to decide in which foreign market to invest excess cash b. to decide where to borrow at the lowest cost c. to determine whether to require a subsidiary to remit funds or invest them locally d. to speculate on exchange rate movements ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 74. Sensitivity analysis allows for all of the following except: a. accountability for uncertainty. b. focus on a single point estimate of future exchange rates. c. development of a range of possible future values. d. consideration of alternative scenarios.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 75. If graphical points lie above the perfect forecast line, then the forecast overestimated the future value. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 76. A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the United States and Canada was −0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____. a. increases; increases b. decreases; increases c. increases; decreases d. decreases; decreases ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 77. Different departments in an MNC should establish their own exchange rate forecasts because each department can Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates best determine the type of forecasts that it needs. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 78. Market-based forecasting is based on fundamental relationships between economic variables and exchange rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 79. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 80. Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates 81. The ideal currency for short-term deposits by an MNC will exhibit a high interest rate and appreciate over the investment period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 82. If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and the spot rate will provide similar forecasts. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 83. Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 84. Forecast errors tend to be large for short forecast horizons. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Forecasting Exchange Rates STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations 1. Translation exposure reflects: a. the exposure of a firm's 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 2. Transaction exposure reflects: a. the exposure of a firm's internationall 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: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. Economic exposure refers to: a. the exposure of a firm's 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. e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 4. Diz Co. is a U.S.-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 Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk? a. Diz Co. Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations b. Yanta Co. c. The firms have about the same level of exposure. d. Neither firm has any exposure.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk? a. Jacko Co. b. Kriner Co. c. The firms have about the same level of exposure. d. Neither firm has any exposure.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 6. According to the text, currency volatility levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time. a. are; are not b. are; are c. are not; are not d. are not; are ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. Which of the following operations benefits from appreciation of the firm's local currency? a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. b. receiving earnings dividends from foreign subsidiaries c. purchasing supplies locally rather than overseas Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations d. exporting to foreign countries ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. Which of the following operations benefit(s) 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 9. Economic exposure can affect: a. MNCs only. b. purely domestic firms only. c. A and B d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 10. Under FASB 52: a. translation gains and losses are included in the reported net income. b. translation gains and losses are included in stockholder's equity. c. A and B d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 11. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure. a. strong dollar; favorably b. weak dollar; not c. strong dollar; not d. weak dollar; favorably ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies.

During ____ dollar cycles, cash outflows are ____. a. weak; somewhat stable b. weak; favorably affected c. weak; adversely affected d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will: a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency. a. favorably; stronger b. not; stronger c. favorably; weaker d. not; weaker e. B and D ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 15. 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 ____. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. A firm produces products for which substitute products are produced in all countries. Appreciation of the firm's local currency should: a. increase local sales as it reduces foreign competition in local markets. b. increase the firm's exports denominated in the local currency. c. increase the returns earned on the firm's foreign bank deposits. d. increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above ANSWER: e POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 17. A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should: a. decrease local sales as foreign competition in local markets is reduced. b. decrease the firm's exports denominated in the local currency. c. decrease the returns earned on the firm's foreign bank deposits. d. decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above ANSWER: e POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 18. If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____. a. positive; interest expenses b. positive; gross profit c. negative; gross profit d. negative; interest expenses ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in the firm’s stock price (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod. a. negative; positive b. positive; positive c. positive; negative d. negative; negative ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 20. A set of currency cash inflows is more volatile if the correlations are low. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. Which of the following is not a form of exposure to exchange rate fluctuations? a. transaction exposure b. credit exposure c. economic exposure d. translation exposure ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 22. 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 RATIONALE: A$1,000,000 − A$1,500,000 = −A$500,000 × $.55 = −$275,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations 23. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Volusia, Inc. is a U.S.-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 dollar 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.

24. Refer to Exhibit 10-2. What is the portfolio standard deviation? a. 3.00% b. 5.44 percent c. 17.98 percent d. none of the above ANSWER: RATIONALE:

b

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 25. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed. a. −9.00 percent b. −30.00 percent. c. −5.00 percent d. none of the above ANSWER: a

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations RATIONALE:

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 26. Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows. a. reduction; reduction b. increase; increase c. increase; reduction d. reduction; increase ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 27. In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency. a. be hurt by; appreciated b. benefit from; depreciated c. be hurt by; depreciated d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. If the U.S. dollar appreciates, an MNC's: a. U.S. sales will probably decrease. b. exports denominated in U.S. dollars will probably increase. c. interest owed on foreign funds borrowed will probably increase. d. exports denominated in foreign currencies will probably increase. e. all of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCFt = a0 + a1et + µt where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of 2. This indicates that: a. if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. b. if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%. c. if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. d. if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. e. none of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 32. ____ is (are) not a determinant of translation exposure. a. The MNC's degree of foreign involvement b. The locations of foreign subsidiaries c. The local (domestic) earnings of the MNC d. The accounting methods used ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD): PCFt = a0 + a1et + µt where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Currency Australian dollar (A$) Sudanese dinar (SDD)

Regression Coefficient (a1) Earlier Subperiod −.80 .20

Regression Coefficient (a1) Recent Subperiod .10 .25

Based on these results, which of the following statements is probably not true? a. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. b. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. e. All of the above are true.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Application

34. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. 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 percent. b. 2.63 percent. c. 4.33 percent. d. 5.55 percent.

ANSWER: a RATIONALE:

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 35. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL); 30 percent of the MNC's funds are lev and 70 percent are leu. The standard deviation of exchange movements is 10 percent for lev and 15 percent for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately: a. 17.28 percent. b. 13.15 percent. c. 14.50 percent. d. 12.04 percent.

ANSWER: b RATIONALE:

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 36. One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. Because creditors may prefer that firms maintain low exposure to exchange rate risk, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 38. A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 39. Two highly negatively correlated currencies move in tandem almost as if they are the same currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. The Canadian dollar’s volatility has changed over time but is normally less than the volatility of other currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 42. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 43. If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 44. An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 45. Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is the percentage change in the foreign currency. The coefficient is negative. This implies that the company's stock price increases if the foreign currency appreciates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 46. A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 47. Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

48. A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 50. The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 51. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. A reduction in hedging will probably reduce transaction exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. The VaR method presumes that the distribution of exchange rate movements is normal. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 55. Assume that exchange rate movements were unusually stable in a recent period (but will not continue to be so stable in the future) that was used to derive the estimated maximum expected loss based on the VaR method. The estimated expected loss derived using VaR based on that recent period will likely overestimate the actual maximum expected loss in the future. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 56. Some MNCs are subject to economic exposure without being subject to transaction exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 57. If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 58. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to: a. economic exposure. b. transaction exposure. c. translation exposure. d. economic and transaction exposure.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 59. Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations the next several years. If the Japanese yen appreciates, Jenco’s imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____. a. increase; decrease b. decrease; increase c. increase; stay the same d. stay the same; stay the same ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 60. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will: a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position. b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position. c. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position. d. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 61. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency. a. favorably; stronger b. favorably; weaker c. not; stronger d. not; weaker ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations 62. If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm's ____. a. positive; interest expenses b. positive; gross profit c. negative; gross profit d. negative; interest expenses ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 63. If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's ____. a. positive; interest expenses b. positive; gross profit c. negative; interest expenses d. negative; gross profit ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 64. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to: a. economic exposure. b. translation exposure. c. transaction exposure. d. no exposure to exchange rate fluctuations.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 65. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except: a. the interest rate in the country of the subsidiary. b. the proportion of business conducted by the subsidiary.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations c. its accounting method. d. the exchange rate movements of the subsidiary's currency.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 66. Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is −2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23. a. −$38,468 b. −$21,371 c. −$17,097 d. −$4,274 ANSWER: RATIONALE:

d Net exposure = €250,000 − €200,000 = €50,000 Maximum one-month loss: −2% − (1.65 × 3%) = −6.95% $1.23 × (−.0695%) × €50,000 = −$4,274

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 67. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-atrisk (VaR) method based on a 97.5 percent confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.35. a. −$4,303 b. −$7,830 c. −$5,873 d. −$1,958 ANSWER: RATIONALE:

c Net exposure = €200,000 − €50,000 = €150,000 Maximum one-month loss: 2% − (1.96 × 2.5%) = −2.9% €150,000 × $1.35 × (−0.029) = −$5,873

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 68. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars.

Additionally, Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to: a. transaction exposure. b. economic exposure. c. translation exposure. d. all of the above.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 INFM.MADU.15.10.03 INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 69. Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____. a. increase; decrease b. decrease; remain unchanged c. decrease; increase d. increase; remain unchanged ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 70. Assume that the Japanese yen is expected to depreciate substantially over the next year. A U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of the MNC will ____ because of the yen's depreciation. a. decrease b. increase Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations c. remain unchanged d. A and C are possible ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 71. If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 72. A purely domestic firm is never exposed to exchange rate fluctuations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 73. An MNC’s stock valuation will not be affected by translation exposure if the MNC’s consolidated financial statements are prepared according to the accounting rules in FASB 52. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations 74. Currency correlations are generally negative. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 75. Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 76. The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 77. The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations KEYWORDS:

Bloom's: Comprehension

78. Purely domestic firms are never affected by economic exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 79. Translation exposure affects an MNC's cash flows. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 80. Since earnings can affect stock prices, many MNCs are concerned about translation exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 81. Which of the following is not true regarding currency correlations? a. Two highly positively correlated currencies act almost as if they are the same currency. b. If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset. c. If two inflow currencies are negatively correlated, transaction exposure is somewhat offset. d. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 82. Which of the following is not true regarding economic exposure? a. Even purely domestic firms can be affected by economic exposure. b. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. e. All of the above are true.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 11: Managing Transaction Exposure 1. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 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: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 3. Assume the following information: U.S. deposit rate for 1 year U.S. borrowing rate for 1 year Swiss deposit rate for 1 year Swiss borrowing rate for 1 year Swiss forward rate for 1 year Swiss franc spot rate

= = = = = =

11% 12% 8% 10% $.40 $.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? a. $234,000 b. $238,584 c. $240,000 d. $236,127 ANSWER:

c

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Chapter 11: Managing Transaction Exposure RATIONALE: SF600,000 × $.40 = $240,000 POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 4. An example of cross-hedging is: a. find two currencies that are highly positively correlated; match the payables in one currency to the receivables in 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 5. Which of the following reflects a hedge of net payables in British pounds by a U.S. firm? a. Purchase a currency put option in British pounds. b. Sell pounds forward. c. Sell a currency call option in British pounds. d. Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. e. A and B ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 6. If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be: a. a money market hedge. b. a forward sale of yen. c. purchasing yen call options. d. purchasing yen put options. e. selling yen put options.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 7. The real cost of hedging payables with a forward contract equals: a. the dollar cost of hedging minus the dollar cost of not hedging. b. the dollar cost of not hedging minus the dollar cost of hedging. c. the dollar cost of hedging divided by the dollar cost of not hedging. d. the dollar cost of not hedging divided by the dollar cost of hedging.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 8. >From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is: a. negative. b. zero. c. positive and large. d. positive and small.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 9. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge. a. can; can b. can; cannot c. cannot; can d. cannot; cannot ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 10. 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. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 11. 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 e. $580,000 ANSWER: d RATIONALE: ($.61 − $.02) × SF1,000,000 = $590,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 12. 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. currency option contract c. parallel loan d. money market hedge Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 13. If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will ____. a. have the same result as a call option hedge on payables b. have the same result as a put option hedge on payables c. have the same result as a money market hedge on payables d. require more dollars than a money market hedge e. A and D ANSWER: c POINTS: 1 DIFFICULTY: Moderate NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 14. Assume that Parker Co. will receive SF200,000 in 360 days. Assume the following interest rates: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Co. uses a money market hedge, it will receive ____ in 360 days. a. $101,904 b. $101,923 c. $98,769 d. $96,914 e. $92,307 ANSWER: RATIONALE:

d 1.

2.

3.

Borrow SF190,476 (SF200,000/1.05) = SF190,476.

Convert SF190,476 to $91,428 (SF190,476 × $.48) = $91,428.

Invest $91,428 at 6% to accumulate $96,914 ($91,428 × 1.06) = $96,914.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure 15. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will: a. receive $750,000 today. b. receive $750,000 in 90 days. c. pay $750,000 in 90 days. d. receive $480,000 today. e. receive $480,000 in 90 days.

ANSWER: a RATIONALE: C$600,000 × $0.80 = $480,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 16. Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. a. $360,000 b. $338,000 c. $332,000 d. $336,000 e. $344,000 ANSWER: e RATIONALE: ($1.68 + $.04) × £200,000 = $344,000 POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 17. Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability $.61 10% $.63 20% $.64 40% $.65 30% The probability that the forward hedge will result in more dollars received than not hedging is: Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure a. 10 percent. b. 20 percent. c. 30 percent. d. 50 percent. e. 70 percent.

ANSWER: RATIONALE:

c The forward hedge will result in more dollars if the spot rate is less than the forward rate, which is true in the first two cases.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 18. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days $.48 $.49 $.55

Probability 10% 60% 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 percent b. 30 percent c. 40 percent d. 70 percent e. none of the above ANSWER: RATIONALE:

d The put option will be exercised in the first two cases, resulting in an amount received per unit of $.51 − $.02 = $.49. Thus, the forward hedge will result in more U.S. dollars received ($.51 per unit).

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 19. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text. a. index Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure b. futures c. forward d. money market e. currency option ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 20. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23.

Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____. a. $0. b. −$7,500. c. $7,500. d. none of the above ANSWER: c RCH(1) RATIONALE: = (MYR1,500,000 × $0.20) − (MYR1,500,000 × $0.23) = −$45,000 RCH(2) = (MYR1,500,000 × $0.25) − (MYR1,500,000 × $0.23) = $30,000 E[RCH] = (.30)(−45,000) + (.7)(30,000) = 7,500 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application

360-day borrowing rate 360-day deposit rate

U.S. 6% 5%

Jordan 5% 4%

21. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)? a. $377,115 b. $373,558 c. $363,019 d. $370,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure ANSWER: RATIONALE:

d 1.

Borrow JOD238,095.24 (JOD250,000/1.05) = JOD238,095.24.

2.

Convert JOD238,095.24 to $352,380.95 (JOD238,095.24 × $1.48) = $352,380.95.

3.

Invest $352,380.95 at 5% to accumulate $370,000 ($352,280.95 × 1.05) = $370,000.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 22. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)? a. $224,135 b. $226,269 c. $224,114 d. $223,212 ANSWER: b 1.

Need to invest JOD144,230.76 (JOD150,000/1.04) = JOD144,230.76.

RATIONALE: 2.

Need to convert $213,461.52 to obtain the JOD144,230.76 dinar (JOD144,230.76 × $1.48) = $213,461.52.

3.

At the end of 360 days, need $226,269.22 ($213,461.52 × 1.06) = $226,269.21.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 23. Lorre Co. needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar: Possible Value of Canadian Dollar in 90 Days Probability $0.54 15% 0.57 25% 0.58 35% 0.59 25% The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?

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Chapter 11: Managing Transaction Exposure a. 40 percent b. 60 percent c. 15 percent d. 85 percent ANSWER: RATIONALE:

a Since Lorre locks into the $.575 with a forward contract, the first two cases would have been cheaper had Lorre not hedged (15% + 25% = 40%).

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 24. Quasik Corp. will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its receivables position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge? a. $219,000 b. $222,000 c. $216,000 d. $213,000 ANSWER: c RATIONALE: ($.73 − $.01) × 300,000 = $216,000.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 25. FAB Corp. will need 200,000 Canadian dollars (C$) in 90 days to cover a payables position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payables position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost? a. $144,000 b. $148,000 c. $152,000 d. $150,000 ANSWER: a RATIONALE: ($.71 + $.01) × 200,000 = $144,000. Note: the call option is not exercised since the spot rate is less than the exercise price.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 26.

You are the treasurer of Arizona Corp. and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is: Future Spot Rate Probability $.46 20% $.48 30% $.52 50% The 90-day forward rate of the Australian dollar is $.50.

What is the probability that the put option will be exercised (assuming Arizona purchased it)? a. 0 percent b. 80 percent c. 50 percent d. none of the above ANSWER: c Arizona will exercise when the exercise price is greater than the future spot (20% + 30% = RATIONALE: 50%).

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 27. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge. a. put option b. forward c. call option d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 28. Which of the following might be used to hedge exposure in the long run? a. long-term forward contract b. money market hedge Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure c. parallel loan d. A and C ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 29. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____. a. leading b. lagging c. cross-hedging d. currency diversification e. all of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 30. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries, and it may not be necessary to hedge the position of each individual subsidiary. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 31. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency. a. receivable; purchase b. payable; sell c. payable; purchase d. none of the above ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 32. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions. a. forward; small b. futures; large c. forward; large d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 33. Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07.

The spot rate of the euro in 90 days is forecasted to be $1.02. Based on this information, the expected value of the real cost of hedging payables is $____. a. −25,000 b. 25,000 c. −107,000 d. 10,700 ANSWER: a RATIONALE: E[RCHp] = 500,000 × [−$.05] = -$25,000 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 34. 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. highly negative. c. zero. d. none of the above ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 35. The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 36. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States? a. $952,381 b. $995,851 c. $943,396 d. $995,025 ANSWER: b RATIONALE: 1,000,000/[1 + (5% × 30/360) = $995,851 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 37. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the United States at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge? a. $1,000,000 b. $1,055,602 c. $1,000,830 d. $1,045,644 ANSWER: c 1.

RATIONALE: Borrow $995,851 from a U.S. bank (€1,000,000 × $1.00 × [1 + (.05 × 30/360)] 2.

Convert $995,851 to €995,851, given the exchange rate of $1.00 per euro.

3.

Use the euros to purchase a German security that offers 0.42% interest over 30

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Chapter 11: Managing Transaction Exposure days.

4.

Repay the U.S. loan in 30 days, plus interest; the amount owed is $1,000,830 (computed as $995,851 × [1 + (.06 × 30/360)]).

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 38. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 39. If interest rate parity exists, the forward hedge will always outperform the money market hedge. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 40. To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge. a. money market b. futures c. forward d. options ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Comprehension

41. A ____ is not normally used for hedging long-term transaction exposure. a. long-term forward contact b. futures contract c. currency swap d. parallel loan ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 42. A ____ does not represent an obligation. a. long-term forward contract b. currency swap c. parallel loan d. currency option ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 43. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 44. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 45. A money market hedge involves taking a money market position to cover a future payables or receivables position. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 46. To hedge a payables position with a currency option hedge, an MNC would write a call option. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 47. Many MNCs use selective hedging, in which they consider each type of transaction separately. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 48. Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 49. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 50. When the real cost of hedging payables is positive, this implies that hedging was more favorable than not hedging. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 51. A futures hedge involves taking a money market position to cover a future payables or receivables position. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 52. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 53. The price at which a currency put option allows the holder to sell a currency is called the settlement price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 54. A put option essentially represents two swaps of currencies: one swap at the inception of the loan contract and another swap at a specified date in the future. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 55. The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 56. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased.

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Chapter 11: Managing Transaction Exposure a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 57. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 58. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 59. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure 60. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates 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: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 61. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: a. sell euros forward b. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 62. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: a. sell euros forward b. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure 63. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)? a. $330,000 b. $325,000 c. $320,000 d. $340,000 ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 64. You are the treasurer of Montana Corp. and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is: Future Spot Rate Probability $.01035 20% $.01032 20% $.01030 30% $.01029 30% The 90-day forward rate of the Japanese yen is $.01033.

What is the probability that the call option will be exercised (assuming Montana purchased it)? a. 30 percent b. 60 percent c. 20 percent d. 40 percent ANSWER: d POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Application 65. A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______. a. highly positively correlated; not highly correlated b. highly negatively correlated; not highly correlated c. expected to appreciate; expected to depreciate d. expected to depreciate; expected to appreciate ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 66. A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____. a. the foreign currency; United States b. the foreign currency; foreign country c. dollars; foreign country d. dollars; United States ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 67. If a firm is hedging payables with futures contracts, it may end up paying more for the payables than it would have had it remained unhedged if the foreign currency depreciates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 68. A money market hedge involves taking a money market position to cover a future payables or receivables position. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 69. To hedge a payables position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the United States until the payables are due.

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Chapter 11: Managing Transaction Exposure a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 70. If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 71. MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 72. An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure 73. To hedge a receivables position with a currency option hedge, an MNC would buy a put option. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 74. Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 75. If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 76. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure KEYWORDS:

Bloom's: Knowledge

77. Most MNCs can completely hedge all of their transactions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 78. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 79. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 80. Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Managing Transaction Exposure STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Knowledge

81. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge

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Chapter 12: Managing Economic Exposure and Translation Exposure 1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based MNC’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market. a. be reduced; purchasing b. be reduced; selling c. increase; selling d. increase; purchasing ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 2. Springfield Co., based in the United States, has costs from orders of foreign material that exceed its foreign revenue.

All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar. a. benefit from; be unaffected by b. benefit from; be adversely affected by c. be unaffected by; be adversely affected by d. be unaffected by; benefit from e. benefit from; benefit from ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 3. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Based on these exact figures, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates. a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure KEYWORDS:

Bloom's: Comprehension

4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar. a. reduce; high b. reduce; low c. increase; low d. increase; high ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 5. Which of the following is an example of economic exposure but not an example of transaction exposure? a. An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. b. An increase in the pound's value increases a U.S. firm's cost of British pound payables. c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables. d. A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 6. Rockford Co. is a U.S. manufacturing firm that produces products in the United States and sells all the products to retail stores in the United Kingdom; the sales are denominated in pounds. It finances a small portion of its business with pounddenominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.) a. The dollar value of sales is higher if the pound depreciates against the dollar. b. The dollar value of sales is unaffected by the pound's exchange rate. c. A and B d. None of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 7. If a U.S. firm's expenses are more susceptible to exchange rate movements than its revenue is, the firm will ____ if the dollar ____. a. benefit; weakens b. be unaffected; weakens c. be unaffected; strengthens d. benefit; strengthens ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 8. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than its revenue is, it could reduce economic exposure by ____. If its revenues are more sensitive than its expenses, it could reduce economic exposure by ____. a. decreasing foreign revenues; decreasing foreign expenses b. decreasing foreign revenues; increasing foreign expenses c. increasing foreign revenues; decreasing foreign revenues d. decreasing foreign expenses; increasing foreign revenues ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 9. Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure. a. reduces; increase b. increases; reduce c. reduces; reduce d. A and B e. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 10. It is generally least difficult to effectively hedge various types of: a. translation exposure b. transaction exposure c. economic exposure d. A and C ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 11. 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 tax deductible; are taxed c. are not tax deductible; are not taxed d. are tax deductible; are not taxed ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 12. If a firm does not have foreign subsidiaries, it is not subject to ____. a. transaction exposure b. economic exposure c. A and B d. translation exposure ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 13. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure with a subsidiary in Singapore will be ____ as a result of the exchange rate movement. a. negative b. adversely affected c. favorably affected d. unaffected ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 14. Assume a U.S. 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. loss; larger c. gain; larger d. gain; smaller ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 15. A perfect hedge (full coverage) on translation exposure can usually be achieved when: a. using a money market hedge. b. using a forward hedge. c. using a futures hedge. d. none of the above, since a perfect hedge is nearly impossible.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 16. Assume that a Japanese car manufacturer exports cars that are priced in yen to U.S. dealerships. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the United States with U.S. materials, and those cars are priced in dollars. The manufacturer could reduce its economic exposure by: a. closing down most of its plants in the United States.

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Chapter 12: Managing Economic Exposure and Translation Exposure b. producing more automobiles in the United States. c. relying completely on Japanese suppliers for its parts. d. pricing its exports in dollars.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 17. Wisconsin, Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this? a. increase Zambian supply orders b. increase Zambian sales c. restructure debt to increase debt payments in Zambia d. reduce Zambian sales ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 18. Which of the following firms is not exposed to translation exposure? a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.based parent. b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses. c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany. d. All of the above firms are exposed to translation exposure.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 19. ____ represents any impact of exchange rate fluctuations on a firm's future cash flows. a. Translation exposure b. Economic exposure Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure c. Transaction exposure d. None of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 20. An effective way for an MNC to assess its economic exposure is to review the firm's: a. income statement b. liquidity c. retained earnings d. level of stockholders' equity ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 21. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that: a. cash inflows exceed cash outflows in each foreign currency. b. cash outflows exceed cash inflows in each foreign currency. c. cash inflows match cash outflows in each foreign currency. d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 22. Managing economic exposure is generally perceived to be ____ managing transaction exposure. a. more difficult than b. less difficult than c. just as difficult as d. none of the above ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 23. As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution. a. short-term b. long-term c. immediate d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 24. Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flows is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro. a. positive; positively b. positive; negatively c. negative; positively d. B and C e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 25. Assume that an MNC's cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.10 Bloom's: Comprehension

26. An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars. a. more; fewer b. more; more c. less; fewer d. less; more ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 27. An MNC has fixed assets in Europe that it expects to sell in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future. a. asset; matches b. asset; exceeds c. liability; matches d. liability; is less than ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 28. Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 29. ____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure financial statements. a. Translation b. Transaction c. Economic d. None of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 30. ____ is (are) not a limitation of hedging translation exposure. a. Inaccurate stock price forecasts b. Inadequate forward contracts for some currencies c. Taxation on gains from forward contracts d. Increased transaction exposure ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 31. To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency. a. purchase the currency forward b. sell the currency forward c. purchase futures contracts of the currency d. A or C e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 32. Which of the following is a possible strategy for reducing economic exposure? a. hedging with forward contracts b. purchasing foreign supplies Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure c. financing with foreign funds d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 33. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 34. A foreign subsidiary with expenses that are more susceptible to exchange rate movements than its revenue will be favorably affected by an appreciation of the foreign currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 35. U.S. firms can attempt to hedge the translation exposure of their European subsidiaries with a forward purchase of euros. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure 36. Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 37. A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 38. The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss). a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 39. All MNCs are subject to translation exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure KEYWORDS:

Bloom's: Knowledge

40. U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies will probably be less affected by weakness in Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 41. The management of economic exposure is normally focused completely on transactions that will occur in the next three months. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 42. Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 43. Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 44. Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidated income statement) to ____. If the firm desires to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market. a. decrease; purchasing b. decrease; selling c. increase; selling d. increase; purchasing ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 45. If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____. a. benefit; weakens b. be unaffected; weakens c. be unaffected; strengthens d. benefit; strengthens ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 46. Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its supplies from American firms and has no competition in the United States. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains its supplies from a Canadian firm. Based on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure. a. transaction; translation b. translation; transaction c. economic; transaction d. economic; translation ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 47. Tennessee Co. conducts business in the United States and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are expected to be $200,000. To reduce the sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could: a. purchase Canadian supplies b. increase its borrowings in United States. c. decrease prices on Canadian goods. d. decrease its borrowed funds in Canada.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 48. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement. a. favorably; favorably b. favorably; adversely c. adversely; favorably d. adversely; adversely ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 49. All MNCs are subject to transaction exposure. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 50. A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 51. Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows and thus includes transaction exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 52. To reduce economic exposure when a foreign currency has a greater impact on cash inflows than on cash outflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 53. Even if translation exposure does not affect cash flows, it is a concern of many MNCs. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 54. Translation exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge 55. Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 56. Thornton Corp. is based in the U.S. and has no foreign subsidiaries. It has extensive liabilities denominated in Indian rupees resulting from imports from India. However, Thornton's revenues are denominated solely in U.S. dollars. Which of the following is probably not true? a. Thornton would benefit from a depreciation of the Indian rupee. b. Thornton has at least some transaction exposure. c. Thornton has at least some economic exposure. d. Thornton has at least some translation exposure. e. All of the above are true.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Managing Economic Exposure and Translation Exposure 57. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar. a. benefit; appreciation b. benefit; depreciation c. not benefit; appreciation d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Comprehension 58. ____ is (are) a limitation of hedging translation exposure. a. Inaccurate earnings forecasts b. Inadequate forward contracts for some currencies c. Accounting distortions d. Increased transaction exposure e. All of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.10 KEYWORDS: Bloom's: Knowledge

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Chapter 13: Direct Foreign Investment 1. Which of the following purchases does not represent direct foreign investment? a. machinery to be used in manufacturing b. a tract of land c. bonds and other financial assets d. a manufacturing plant ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 2. When an MNC analyzes the feasibility of a project, it should consider the: a. variability of the project's cash flow. b. correlation of the project's cash flow relative to the prevailing cash flows of the MNC. c. A and B d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 3. The ____ the variability of a project’s cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project. a. higher; higher b. higher; lower c. lower; lower d. lower; higher ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 4. The most important cost-related motive for direct foreign investment is diversification across product markets. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 5. An MNC’s cash flows are likely to be less volatile if its percentage of foreign sales is ____ and the number of foreign countries it sells products to is ____. a. high; large b. high; small c. low; small d. high; large ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 6. According to the text, a firm may be able to achieve a "more efficient" project portfolio if it: a. focuses solely on one product. b. focuses solely on one location to market what it produces. c. A and B d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 7. According to the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI: a. would compete with local firms of the host country. b. would produce a good not currently available in the host country. c. would produce a good and export it to other countries. d. B and C ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 8. If countries’ economies are highly integrated, 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 whose economies are less integrated. a. high and positive; more b. close to zero; more c. high and positive; less d. close to zero; less ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 9. An MNC will likely benefit most from diversifying if: a. the correlations between country economies are high. b. the correlations between country economies are low. c. the variability of all country economy levels is high. d. B and C ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 10. When a foreign currency is perceived by an MNC to be undervalued, the MNC may consider direct foreign investment in that country, as the initial outlay should be relatively low. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 11. A country presently has a high level of unemployment because of weak economic conditions, and its income levels are Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment very low. This country would most likely be an attractive target for direct foreign investment by MNCs as a result of the motive to _______________. a. enter markets where superior profits are possible. b. react to trade restrictions. c. diversify internationally. d. use foreign factors of production.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 12. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 13. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms: a. is the top point. b. is the point closest to the vertical axis. c. is the point halfway between the two end points. d. cannot be determined since firms vary in their willingness to accept risk.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 14. Direct foreign investment is perceived by foreign governments to: a. be a cause of national problems. b. be a remedy for national problems. c. either A or B is possible.

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Chapter 13: Direct Foreign Investment d. have no impact on national problems.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 15. Direct foreign investment would typically be welcomed if: a. the products to be produced are substitutes for other locally produced products. b. people from the country of the company's headquarter are transferred to the foreign country to work at the subsidiary. c. the products to be produced are going to be exported. d. all of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 16. Assume a U.S. MNC initiates direct foreign investment in the United Kingdom. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 17. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true? a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan. b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain. c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.

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Chapter 13: Direct Foreign Investment d. B and C ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 18. Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the foreign country now if the government of that country: a. eliminates all quotas. b. reduces all quotas. c. increases all quotas. d. eliminates all tariffs.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 19. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 20. According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand. a. Paraguay b. Morocco c. Sweden d. China ANSWER: d POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 21. ____ is not a disadvantage of direct foreign investment. a. The expense of establishing a foreign subsidiary b. The uncertainty of inflation and exchange rate movements c. Political risk d. All of the above are disadvantages of direct foreign investment.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 22. Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns. a. decrease b. increase c. decrease or increase, depending on the exact size of the returns and standard deviations d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Application 23. Which of the following is not true regarding host government attitudes toward direct foreign investment (DFI)? a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances. b. Host governments generally perceive DFI as a remedy to eliminate a country's political problems. c. The ability of a host government to attract DFI is dependent on the country's markets and resources. d. Some types of DFI will be more attractive to some governments than to others. e. All of the above are true.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Comprehension

24. Which of the following is not true regarding the efficient frontier considered by MNCs? a. There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion. b. The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects. c. Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project. d. All of the above are true. e. A and C are false.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: DISC.INFM.MADU.15.09 25. Which of the following is not a cost-related motive of direct foreign investment? a. International diversification. b. Low labor costs. c. Land can be purchased at a low price. d. Manufacturing plants can be built for a low price.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 26. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 27. ____ is not a revenue-related motive for direct foreign investment.

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Chapter 13: Direct Foreign Investment a. Attracting new sources of demand b. Fully benefiting from economies of scale c. Exploiting monopolistic advantages d. Entering profitable markets ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 28. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 29. Developing countries are mostly targeted for direct foreign investment because they have advanced technology. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 30. Direct foreign investment is normally completed first, and then capital budgeting can be applied later. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 31. The best way to accomplish the revenue-related motive of attracting new sources of demand is to: 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 restrictions 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: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 32. 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 restrictions 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 33. To exploit monopolistic advantages, 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 restrictions will adversely affect the firm's export volume. d. establish subsidiaries in markets where competitors are unable to produce the identical product.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Knowledge

34. To fully benefit from economies of scale, an MNC should: a. establish a subsidiary in a new market that can sell products produced elsewhere. b. establish a subsidiary in a market that has relatively low costs of labor or land. c. establish a subsidiary in a market where raw materials are cheap and accessible. d. participate in a joint venture in order to learn about a production process or other operations.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 35. The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 36. When economic conditions of two countries are ____, an MNC would ____ its risk by operating in both countries instead of concentrating just in one. a. highly correlated; reduce b. not highly correlated; not reduce c. not highly correlated; reduce d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 37. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as "optimal" for all MNCs. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 38. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 39. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 40. Although direct foreign investment is sometimes conducted, benefits are rarely realized. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 41. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.

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Chapter 13: Direct Foreign Investment a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 42. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 43. In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 44. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment 45. Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in Western Europe. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 46. Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____. a. increase; postpone remitting earnings until the euro weakens b. decrease; postpone remitting earnings until the euro weakens c. decrease; remit earnings immediately before the euro weakens d. increase; remit earnings immediately before the euro weakens ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Application 47. To diversify internationally for the purpose of reducing risk, which strategy is appropriate? a. Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based. b. Establish a subsidiary in a market that has relatively low cost of labor or land. c. Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time. d. Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 48. To fully benefit from use of foreign raw materials: a. establish a subsidiary in a market where raw materials are cheap and accessible. b. sell the finished product to countries where the raw materials are more expensive. c. establish a subsidiary in a new market that can sell products produces elsewhere.

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Chapter 13: Direct Foreign Investment d. A and B ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 49. Procedural and documentation requirements imposed by the foreign government on an MNC pursuing DFI are referred to as: a. regulatory barriers. b. industry barriers. c. protective barriers. d. "red tape" barriers.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 50. The overall variability of a firm's returns depends on the expected return of each individual project, the percentage of funds invested in each individual project, and the correlation coefficient of returns between the investments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 51. MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Direct Foreign Investment KEYWORDS:

Bloom's: Knowledge

52. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 53. Direct foreign investment is commonly considered by MNCs because it allows the MNC to: a. attract new sources of demand. b. enter profitable markets. c. react to exchange rate movements. d. react to trade restrictions. e. all of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge

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Chapter 14: Multinational Capital Budgeting 1. If a U.S. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use: a. a risk-adjusted discount rate. b. a payback period. c. certainty equivalents. d. simulation.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 3. When evaluating international project cash flows, which of the following factors is relevant? a. future inflation b. blocked funds c. exchange rates d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis? a. the withholding tax rate b. the euro's exchange rate c. the U.S. tax rate on earnings remitted to the United States d. the German government's tax rate e. A and C ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 7. In capital budgeting analysis, the use of a cumulative NPV is useful for: a. determining a probability distribution of NPVs. b. determining the time required to achieve a positive NPV. c. determining how the required rate of return changes over time. d. determining how the cost of capital changes over time. e. A and B ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 8. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by: a. the cost of borrowing funds in the United Kingdom. b. the economic conditions in the United Kingdom. c. the parent's cost of capital. d. A and B ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States.

If the peso ____, the dollar amount of remitted funds ____. a. appreciates; decreases b. depreciates; is unaffected c. appreciates; is unaffected d. depreciates; decreases e. B and C ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 10. Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when: a. the subsidiary finances the entire investment by local borrowing. b. the subsidiary finances most of the investment by local borrowing. c. the parent finances most of the investment. d. the parent finances the entire investment.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 11. If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project. a. adversely; adversely b. favorably; adversely c. favorably; favorably d. adversely; favorably ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 12. An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value? a. about NZ$11 million b. about NZ$15 million c. about NZ$31 million d. about NZ$37 million e. about NZ$25 million ANSWER: a 1. $7,200,000/(1.18) = $6,101,695 RATIONALE: NZ$12,000,000 × $.60 = $7,200,000 2. = $12,927,320 NZ$30,000,000 × $.60 = $18,000,000/(1.18)2 $18,000,000 $19,029,015 Break-even salvage = [Initial outlay − PV of cash flows] (1 + k) n value = [$30,000,000 − $19,029,015] (1.18)2 = $15,276,000 Break-even salvage value in NZ$ POINTS: DIFFICULTY:

= $15,276,000/$.60 = NZ$25,459,999

1 Challenging

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Chapter 14: Multinational Capital Budgeting LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 13. A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 14. If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 15. Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____. a. appreciate; low b. appreciate; high c. depreciate; high d. depreciate; low ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting 16. If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 17. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 18. The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where: a. the taxes are the same as in the United States. b. there are no blocked fund restrictions. c. the currency of the host country is expected to depreciate consistently. d. none of the above; a discrepancy is not possible.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 19. The break-even salvage value of a particular project is the salvage value necessary to: a. offset any losses incurred by the subsidiary in a given year. b. offset any losses incurred by the MNC overall in a given year. c. make the project have zero profits. d. achieve a zero net present value for the project.

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Chapter 14: Multinational Capital Budgeting ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 20. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 21. A foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective.

Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective. a. negative b. higher than that for the Hungarian project c. lower than that for the Hungarian project d. the same as that for the Hungarian project e. A and C ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 22. A U.S.-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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting 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 e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project after four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's 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 NOK10,000,000

Year 2 NOK15,000,000

Year 3 NOK17,000,000

Year 4 NOK20,000,000

The current exchange rate of the Norwegian kroner is $.135. Baps's exchange rate forecasts for the Norwegian kroner over the project's lifetime are listed below: Year 1 $.13

Year 2 $.14

Year 3 $.12

Year 4 $.15

23. Refer to Exhibit 14-1. What is the net present value of the Norwegian project? a. −$803,848 b. $5,803,848 c. $1,048,829 d. none of the above ANSWER: c Year 0 Year 1 Year 2 RATIONALE: Cash flow to parent PV of parent cash flow Cumulative NPV

−$5,000,000

$1,300,000

$2,100,000

Year 3 $2,040,000

Year 4 $3,000,000

1,150,442

1,644,608

1,413,822

1,839,956

−3,849,558

−2,204,950

−791,128

1,048,828

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 24. Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in Year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is $____.

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Chapter 14: Multinational Capital Budgeting a. 510,088.04 b. 1,710,088 c. 1,040,000 d. none of the above ANSWER: RATIONALE:

d Even if there is no salvage value, the NPV would still be positive, as shown below: Cash flow to parent PV of parent cash flow Cumulative NPV

Year 0 −$5,000,000

Year 1 $1,300,000

Year 2 $2,100,000

Year 3 $2,040,000

Year 4 $1,800,000

1,150,442

1,644,608

1,413,822

1,103,974

−3,849,558

−2,204,950

−791,128

312,846

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 25. Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent? a. −$17,602.62 b. $8,000,000 c. $1,048,829 d. $645,147 ANSWER: d Year 0 Year 1 Year 2 Year 3 Year 4 RATIONALE: Cash flow to parent PV of parent cash flow Cumulative NPV

−$5,000,000

$1,300,000

$2,100,000

$2,040,000

$3,000,000

1,120,690

1,560,642

1,306,942

1,656,873

−3,879,310

−2,318,668

−1,011,726

645,147

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 26. Petrus Co. has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and A$2,000,000 in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14 percent. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?

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Chapter 14: Multinational Capital Budgeting a. $2,905,817 b. −$94,183 c. $916,128. d. none of the above ANSWER: RATIONALE:

b Cash flow to parent PV of parent cash flow Cumulative NPV

Year 0 −$1,500,000

Year 1 $550,000 482,456 −1,017,544

Year 2 $1,200,000 923,361 −94,183

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 27. Which of the following is not a characteristic of a tax system that an MNC that would consider when conducting a tax assessment of a country? a. corporate income taxes b. withholding taxes c. provisions for carrybacks and carryforwards d. tax treaties e. all of the above are characteristics to be considered.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 28. Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment. a. withholding taxes b. excise taxes c. tax credits d. carryforwards ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting 29. If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view. a. high; subsidiary's b. high; parent's c. low; parent's d. A and C e. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 30. If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____. a. positively b. negatively c. either positively or negatively, depending on the percentage of appreciation d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 31. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 32. The ____ is (are) likely the major source of funds to support a particular project. a. initial investment Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting b. variable costs c. fixed costs d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 33. Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 34. The required rate of return of a project is ____ the MNC's cost of capital. a. greater than b. less than c. the same as d. any of the above, depending on the specific project ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 35. Holding other factors constant, 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. positively; negatively c. negatively; positively d. negatively; negatively ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 36. Holding other factors constant, an international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value. a. positively; positively b. positively; negatively c. negatively; positively d. negatively; negatively ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 37. Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be. a. higher; lower b. higher; higher c. lower; higher d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 38. 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 through 5. a. depreciates; depreciates b. appreciates; appreciates c. depreciates; appreciates d. appreciates; depreciates ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.03 Bloom's: Comprehension

39. Which of the following is not a factor that should be considered in multinational capital budgeting? a. Blocked funds b. Exchange rate fluctuations c. Inflation d. Financing arrangements e. All of the above should be considered.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 40. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis. a. should be; should be b. should definitely not be; should definitely not be c. should definitely not be; should be d. should be; should definitely not be ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 41. As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____. a. increases; decreases b. decreases; increases c. increases; increases d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting 42. In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 43. The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 44. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 45. In multinational capital budgeting, depreciation is treated as a cash outflow. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting KEYWORDS:

Bloom's: Knowledge

46. No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 47. If a foreign project is financed with a subsidiary's retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 48. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 49. Some capital budgeting projects contain real options in that they provide opportunities to obtain or eliminate specified real assets such as machinery or a manufacturing plant. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 50. Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 51. Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 52. Fixed costs are expenses that are not affected by consumer demand, so they can be estimated without an estimate of that demand when doing multinational capital budgeting. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 53. If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 54. If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 55. Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of riskadjusted discount rates, sensitivity analysis, and simulation. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 56. The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 57. The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting of the input variables. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 58. ____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows. a. The number of units sold by the subsidiary b. The subsidiary's earnings before income and taxes (EBIT) c. The tax rate the subsidiary is subject to in the host country d. Withholding taxes imposed by the host government ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension 59. ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis. a. Discriminant analysis b. Risk-adjusted discount rate c. Sensitivity analysis d. Simulation ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 60. Which of the following is not true regarding simulation? a. It can be used to generate a probability distribution of NPVs. b. It generates a probability distribution of NPVs by randomly drawing values for the input variable(s). c. It can only be used for one variable at a time. d. It can be used to develop probability distributions of all variables with uncertain future values.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Multinational Capital Budgeting DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Comprehension

Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control 1. International governance is achieved by all of the following except: a. poison pills. b. board of directors. c. institutional investors. d. blockholders. e. All of the above achieve governance.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 2. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary? a. The firm can immediately expand its international business. b. An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary. c. International acquisitions are generally cheaper than the establishment of a new subsidiary. d. An international acquisition typically generates larger cash flows than the establishment of a new subsidiary. e. All of the above are advantages of international acquisitions.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 3. According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries. a. the United Kingdom b. Mexico c. Japan d. Germany e. France ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 4. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 5. Based on information in your text, all of the following factors should be considered in an international acquisition, except: a. the target's willingness to be acquired. b. the target's previous acquisition history. c. the target's previous cash flows. d. the target's local economic conditions.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 6. Which of the following tax-related factors need not be considered in assessing a foreign target? a. corporate tax rates in the host country b. withholding tax rates in the host country c. withholding tax rates in the home country d. corporate tax rates in the home country e. All of the above must be considered in assessing a foreign target.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information: Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control •

Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting any taxes due.

•

Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9 percent over the following two years.

•

Cost of goods sold is expected to be 60 percent of revenues.

•

Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

•

The Malaysian tax rate on the target's earnings is expected to be 30 percent.

•

Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

•

The target will need MYR9 million in cash each year to support existing operations.

•

The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.

•

Any cash flows remaining after taxes will be remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.

•

Klimewsky's required rate of return on similar projects is 13 percent.

7. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is $____ million. a. 155.9 b. 111.5 c. 138.0 d. 143.0 e. none of the above ANSWER: b Valuation of Malaysian Target Based on the Assumptions Provided RATIONALE: (numbers are in millions) Revenue Cost of Goods Sold Gross Profit

Year 1 MYR300 MYR180 MYR120

Year 2 MYR327 MYR196.2 MYR130.8

Year 3 MYR356.4 MYR213.8 MYR142.6

Selling & Admin. Exp. Depreciation Earnings Before Taxes

MYR40 MYR15 MYR65

MYR40 MYR15 MYR75.8

MYR40 MYR15 MYR87.6

Tax (30%) Earnings After Taxes

MYR19.5 MYR45.5

MYR22.7 MYR53.1

MYR26.3 MYR61.3

+Depreciation −Funds to Reinvest

MYR15 MYR9

MYR15 MYR9

MYR15 MYR9

Sale of Firm Copyright Cengage Learning. Powered by Cognero.

MYR500 Page 3

Chapter 15: International Corporate Governance and Control Cash Flows in MYR Exchange Rate of MYR Cash Flows in $ PV (13% disc. rate) Cumulative PV

MYR51.5 $.23 $11.8

MYR59.1 $.23 $13.6

MYR567.3 $.23 $130.5

$10.4 $10.4

$10.7 $21.1

$90.4 $111.5

The value of the Malaysian target based on the information provided is $111.5 million.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 8. Refer to Exhibit 15-1. The Malaysian target's value based on its stock price is $____ million. a. 1.4 b. 1,673.9 c. 111.5 d. 88.6 e. none of the above ANSWER: d Since the Malaysian target has 11 million shares outstanding, each of which is worth RATIONALE: MYR35 per share, its market value is 11,000,000 × 35 = MYR385 million × $.23 = $88.6 million.

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 9. Refer to Exhibit 15-1. The target's board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer? a. 30.0 percent b. 25.9 percent c. You should not offer any premium because the market's valuation is below Klimewsky's valuation. d. none of the above ANSWER: b Since your valuation of the target is $111.5 million and the market's valuation of the target RATIONALE: is $88.55 million, you should be willing to offer a maximum premium of $111.5/$88.55 − 1 = 25.9%.

POINTS: 1 DIFFICULTY: Challenging Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.03 KEYWORDS: Bloom's: Application 10. 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 c. Investors anticipate that the target will be acquired. d. All of the above will cause the target's stock price to decrease.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 11. Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target? a. differences in the timing of remittances from the target to the parent b. differences in the desired use of the target c. differences in the local risk-free interest rate d. differences in the exchange rate between the target’s currency and the parent’s currency ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 12. Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC? a. an international acquisition of an existing business b. an international acquisition of a newly privatized business c. an international partial acquisition d. an international divestiture ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control 13. A previously undertaken project in a foreign country may no longer be feasible because: a. interest rates have declined. b. the MNC's cost of capital has decreased. c. the host government has increased its tax rates substantially. d. exchange rate projections have changed from a depreciation to an appreciation of the foreign currency.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 14. An MNC may have to pay a higher price to acquire a target in countries that do not strictly enforce laws against insider trading. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 15. Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 16. At present, U.S. firms acquire more targets in China than in any other country. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Knowledge

17. When a U.S. firm attempts to acquire a target in a country where shareholder rights are weak, it will generally have to pay cash for the shares because the target shareholders will not want to receive stock in the U.S. firm as payment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 18. The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 19. Since the cash flows generated by a foreign target will eventually be converted to the parent's currency, there is no need to consider the foreign exchange rate in the capital budgeting process. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 20. From an acquirer's perspective, the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 21. Premiums required to entice a target's board of directors to approve an acquisition are usually between 1 and 3 percent of the target's market price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 22. A foreign target's expected future cash flows generally vary among different MNCs valuing the target. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 23. An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 24. The valuation of a target (from the parent's perspective) should increase when the potential acquirer's cost of capital increases. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 25. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 26. Acquirers may have different required rates of return because of differences in the local risk-free interest rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 27. An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 28. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target's country are generally high. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 29. Privatization involves the sale of previously government-owned businesses by the government. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 30. An MNC should periodically reassess its investments to determine whether to divest them. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 31. The initial outlay for a project in a foreign country may decline if property values in that country decline. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 32. The valuation of newly privatized businesses is generally more difficult than the valuation of a foreign target that has operated privately for several years. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 33. Other things being equal, a foreign subsidiary in China would more likely be divested by 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Application 34. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary? a. the required rate of return on the subsidiary b. forecasted exchange rates of the subsidiary's currency relative to the dollar c. the initial outlay on the project d. the possible selling price of the project ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 35. Regarding the valuation of privatized businesses in less developed countries, ____ can normally be estimated with a high degree of accuracy. a. future cash flows b. future exchange rate movements c. the proper discount rate d. none of the above ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 36. When U.S. firms acquire publically-traded target firms in foreign countries, they would acquire all the shares of the target at a price that is _________ the existing market price per share. a. equal to b. slightly below c. substantially below d. above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 37. Firms based in ____ tend to acquire more U.S. target firms than firms in the other countries listed here. a. Canada b. Japan c. Germany d. Mexico ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 38. The sale of a subsidiary by an MNC is referred to as a divestiture. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 39. An MNC's parent would consider investing in a target only if the estimated present value of the cash flows it would Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control ultimately receive from the target over time ____ the initial outlay necessary to purchase the target. a. is less than b. is the same as c. is greater than d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 40. Which of the following would not enhance the value of a target from the acquirer's perspective? a. Expected sales of the target have increased. b. The subsidiary's currency is expected to strengthen after the acquisition. c. The required rate of return from investing in the target has increased. d. All of the above would enhance the value of the target.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 41. An international acquisition will typically require that the acquirer pay a premium of 30 percent or more for a publicly traded target. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 42. A target's previous cash flows are typically an accurate indicator of future cash flows, especially when the target's cash flows would have to be converted into the acquirer's home currency as they are remitted to the parent. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 43. Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows. a. strong; lower b. weak; higher c. weak; lower d. strong; higher ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 44. When an MNC assesses targets among countries, it would prefer a country where the growth potential for its industry is ____ and the competition within the industry is ____. a. low; not excessive b. high; excessive c. high; not excessive d. low; excessive ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 45. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement. a. low b. high c. volatile d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control KEYWORDS:

Bloom's: Knowledge

46. If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 47. The earnings of a private European firm are €5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public and issuing one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as ____ million euros. a. 2.4 b. 60.0 c. 41.7 d. 12 ANSWER: c RATIONALE: Market valuation = €5 million × 12 = €60 million POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Application 48. If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate. a. appreciates; by a lesser percentage then b. depreciates; in the same proportion as c. appreciates; in the same proportion as d. appreciates; by a greater percentage than ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control 49. If an MNC targets a successful foreign company with plans to continue the target's local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC's required return from acquiring the target will be relatively ____. a. high; high b. high; low c. low; high d. low; low ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 50. Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 51. An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 52. The Sarbanes-Oxley Act requires executives and the board of directors to conduct a thorough review when assessing acquisitions. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 53. When viewed as a project, an international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger initial outlay. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 54. Downsizing reduces expenses but may also reduce productivity and revenue. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 55. Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 56. When an MNC assesses targets among countries, it would prefer a country in which the growth potential for its respective industry is high and the competition within the industry is not excessive. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 57. Because of errors in cash flow or exchange rate estimates, the estimated net present value of acquiring a foreign target could be underestimated. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 58. A call option on real assets represents a proposed project that contains an option of pursuing an additional venture. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 59. When an MNC considers a partial acquisition, the valuation of the target will be conducted the same way whether the MNC acquires control of the target or only a small portion of its shares. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 60. The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted funds from the target.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 61. When an MNC acquires a target and knows that it will be able to sell the acquisition at any time during the next three years at a specific price, the MNC has acquired a put option on real assets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 62. While acquisitions of privatized businesses may be attractive because of the potential for MNCs to increase their efficiency, the valuation of these businesses is generally more difficult than the valuation of existing businesses. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 63. It is always the best course of action to divest a foreign project if the expected cash flows from the project decline substantially. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control 64. The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 65. The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly after a bid by the acquiring firm. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 66. A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the same industry to the private company's earnings. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 67. The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very high and is expected to decrease over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 68. Which of the following is not an external force that could reduce the present value of a foreign subsidiary’s future cash flows? a. higher taxes imposed by the host government b. depreciation of the local currency c. an increase in the parent’s cost of capital d. weakening of the economy of the host country e. All of the above could reduce the present value of the subsidiary’s future cash flows.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 69. An MNC valuing a foreign target for acquisition purposes must account for all of the following, except: a. the foreign exchange rate. b. withholding taxes imposed by the host government. c. blocked-funds restrictions. d. income taxes imposed by the U.S. government. e. An MNC must account for all of the above.

ANSWER: e POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 70. Which of the following might cause the board of directors of an MNC to not be effective at governance? a. The firm’s CEO serves as chair of the board. b. The board consists mainly of outside members who are not managers of the firm. c. The board consists mainly of inside members who are managers of the firm. d. A and C ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: International Corporate Governance and Control KEYWORDS:

Bloom's: Knowledge

71. An institutional investor such as a public pension fund or mutual fund that invests in the stock of a company and plans to hold the shares for a long time is likely to be a shareholder activist. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 72. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs? a. differences in estimated cash flows to be generated by the foreign target b. differences in estimated exchange rates c. differences in required rates of return d. All of the above are possible reasons why the valuation of a foreign target may vary among MNCs ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge

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Chapter 16: Country Risk Analysis 1. A macro-assessment of country risk: a. is adjusted for the particular business of the firm involved. b. excludes aspects relevant to a particular firm or project. c. A and B d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 2. A micro-assessment of country risk: a. is adjusted for the particular business of the firm involved. b. excludes aspects relevant to a particular firm or project. c. A and B d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 3. The Delphi technique: a. is a method of purchasing information about inspections of the country being evaluated. b. requires the use of discriminant analysis to assess country risk. c. involves the collection of independent opinions on country risk. d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 4. 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.

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Chapter 16: Country Risk Analysis ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 5. The most important variable in determining a country's degree of overall country risk: a. is political risk. b. is financial risk. c. is the probability of a host government takeover. d. may often vary with the country of concern.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 6. According to the text, country risk analysis has: a. almost always detected problems before they occur. b. been effectively used in place of capital budgeting to determine whether a project should be accepted. c. been perfected as a result of the development of discriminant analysis. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 7. To best reduce exposure to a host government takeover, a subsidiary could: a. use a long-run profit perspective for business in that country. b. hire people from its own country (where the parent is located). c. attempt to obtain supplies from its parent for which substitutes are not available. d. borrow funds from its parent rather than from the host country's creditors.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Comprehension

8. Insurance purchased to cover the risk of expropriation ____, and will typically cover ____. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 9. Country risk assessment should be used when: a. determining whether to establish a subsidiary in a foreign country. b. determining whether to continue business in a foreign country. c. A and B d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 10. When determining whether a particular proposed project in a foreign country is feasible: a. a country risk rating can adequately substitute for a capital budgeting analysis. b. country risk analysis should be incorporated within the capital budgeting analysis. c. the effect of country risk on sales revenue is more important than the effect on cash flows. d. the project with the highest country risk rating (lowest country risk) should be accepted. e. B and D ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 11. The primary purpose of country risk analysis when applied to capital budgeting is usually to: Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis a. measure the effect of country risk on sales. b. measure the effect of country risk on cash flows. c. measure the effect of country risk on the consolidated balance sheet. d. measure the effect of country risk on the consolidated income statement.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 12. If a foreign country's consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is 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 U.S. name) that manufactures and sells products in that country. d. develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 13. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary's ability to generate sufficient sales there. The country risk characteristic that would best address this concern is: a. the host government's tax rates charged on remitted earnings. b. the possibility of blocked funds. c. the state of the economy in Germany. d. the possibility of a withholding tax imposed by the German government.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 14. An MNC has a foreign manufacturing plant to capitalize on cheap production costs; the MNC exports all the goods produced. It should be most concerned about the country's: a. growth in gross domestic product. b. government policies designed to increase tariffs on imported goods.

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Chapter 16: Country Risk Analysis c. local consumer purchasing habits. d. government environmental regulations and taxes on the lease or purchase of a production site.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 15. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 16. According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to: a. compare each form of a country risk rating to a benchmark level. b. estimate the effect of each form of country risk on cash flows. c. estimate the effect of each form of country risk on the income statement and balance sheet. d. adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs. ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 17. The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with: a. insurance that covers losses on multilateral netting procedures. b. exchange rate risk insurance. c. political risk insurance. d. guarantees that MNCs will receive the same taxation treatment by the host government as local firms. e. guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.

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Chapter 16: Country Risk Analysis ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 18. Country risk analysis is important because it: a. focuses on whether to hedge contractual transactions. b. focuses on the competitor firms in the industry. c. can be used to improve the analysis used to make long-term investing decisions. d. all of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 19. ____ 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 e. All of the above are forms of political risk.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 20. Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture tablet computers in Eurenasia, while MNC B is considering the establishment of a subsidiary to manufacture tanks there. Which of the two MNCs is likely to be less affected by the low macro-assessment? a. MNC A. b. MNC B. c. Both will be equally affected, since the macro-assessment does not vary. d. none of the above ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 21. Which of the following is not a technique to assess country risk? a. Gamma technique b. Delphi technique c. checklist approach d. inspection visits ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 22. The ____ involves the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions. a. checklist approach b. discriminant analysis c. regression analysis d. Delphi technique ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 23. 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 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Knowledge

24. Which of the following is not a strategy that could be used by an MNC to reduce its exposure to a host government takeover? a. Attempt to recover cash flows from a foreign investment as quickly as possible. b. Rely on unique supplies and/or technology. c. Hire local labor. d. Borrow local funds. e. All of the above are strategies to reduce an MNC's exposure to a host government takeover.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 25. MNCs can purchase insurance to cover the risk of expropriation. Which of the following is not a source of this type of insurance? a. the World Bank b. the Overseas Private Investment Corporation (OPIC) c. the International Monetary Fund (IMF) d. all of the above are sources for insurance against expropriation.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 26. Which of the following is not a way in which country risk analysis can be used? a. to monitor countries where an MNC is currently doing business b. as a screening device to avoid conducting business in countries with excessive risk. c. to revise an MNC's financing decisions d. to determine the degree to which the MNC is exposed to exchange rate movements ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis 27. An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 28. ____ is(are) not a political risk factor. a. High interest rates in a foreign country b. Currency inconvertibility c. War d. Corruption ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 29. A mild form of political risk is a tendency of residents to purchase only: a. imported products. b. locally produced products. c. products produced by MNCs. d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 30. If an MNC attempts to build a subsidiary in a country that will take business away from local firms that are protected by the host government, the host government might do all of the following, except: a. require the use of local employees for managerial positions. b. impose additional taxes. c. subsidize the MNC. d. subsidize the MNC’s competitors.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 31. When a country's currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 32. MNCs try to avoid project finance deals because these deals require the MNC to invest a large amount of its own funds at the beginning of the project. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 33. Higher interest rates in a foreign country tend to ____ the growth of the country’s economy and ____ demand for the MNC's product. a. increase; increase b. reduce; reduce c. increase; reduce d. reduce; increase ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis 34. A ____ currency may ____ the volume of products imported by the country and therefore reduce the country's production and national income. a. weak; increase b. weak; reduce c. strong; increase d. strong; reduce ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 35. Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 36. When a government engages in an expansionary fiscal policy, it cuts government spending and raises taxes in order to reduce its budget deficit. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 37. The most reliable way for the capital budgeting analysis to capture country risk is to increase the discount rate for projects in countries with higher perceived risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 38. Since country risk is constantly changing and events in other parts of the world are largely unpredictable, country risk analysis is not important for MNCs. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 39. A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host government. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 40. Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC's products. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 41. When using a checklist approach to assess country risk, factors should be converted to some numerical forms and assigned equal weights. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 42. Unlike project risk, country risk cannot be incorporated into the capital budgeting analysis of a proposed project by adjustment of the discount rate or by adjustment of the estimated cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 43. After a project is accepted and implemented, country risk does not need to be monitored; since the project is already established, no further changes can be made. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 44. While an overall risk rating of a country can be useful, it cannot always detect upcoming crises. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 45. Country risk can affect an MNC's cash flows but cannot affect its cost of capital. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 46. To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 47. The weights assigned to factors when assessing country risk should always be higher for the political risk factors than for the financial factors. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 48. A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 49. Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.

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Chapter 16: Country Risk Analysis a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 50. U.S.-based firms could avoid country risk by simply avoiding international business. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 51. If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 52. Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC's business. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Country Risk Analysis 53. Adjustments to incorporate country risk into the capital budgeting analysis would involve either the addition of a risk premium to the discount rate or a reduction of the cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 54. Country risk analysis is important because it: a. can be used by MNCs as a screening device to avoid countries with excessive risk. b. can be used by MNCs to monitor countries where the MNC is presently engaged in international business. c. can be used to improve the analysis used to make long-term investing or financing decisions. d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 55. Which of the following is not a form of financial risk? a. exchange rate movements b. inflation rates c. business license requirements imposed on an MNC by the host government d. All of the above are forms of financial risk.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 KEYWORDS: Bloom's: Knowledge 56. Which of the following is not an example of political risk? a. The Japanese government requires an MNC's subsidiary to install exercise rooms for its employees. b. The Swiss government requires an MNC's subsidiary to install filters in its manufacturing plants to reduce pollution. c. Country X, considered for expansion, frequently goes to war with its neighbors. d. Country Y's government has recently taken over the subsidiary of one of your competitors, another U.S.-based MNC. e. All of the above are examples of political risk.

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Chapter 16: Country Risk Analysis ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 57. Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis? a. Adjusting the discount rate upward b. Adjusting the input variables to estimate the sensitivity of the project's NPV c. Adjusting the political risk rating to obtain a more favorable NPV d. Country risk should be ignored in capital budgeting, since it is a subjective analysis.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge

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Chapter 17: Multinational Cost of Capital and Capital Structure 1. An argument for an MNC to have a debt-intensive capital structure is that: a. it can reduce the MNC’s exposure to exchange rate risk on earnings remitted by subsidiaries to the parent. b. it can reduce the chance of bankruptcy. c. it spreads the shareholder base. d. it forces subsidiaries to pay dividends to shareholders.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 2. MNCs headquartered in Japan and Germany tend to use a higher degree of financial leverage than MNCs headquartered in the United States. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 3. According to the text, the cost of capital for an international project will: a. always be greater than the firm's cost of capital. b. always be less than the firm's cost of capital. c. always be the same as the firm's cost of capital. d. none of the above ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 4. Which of the following factors is generally not expected to have a favorable impact on an MNC’s cost of capital according to the text? a. easy access to international capital markets b. high degree of international diversification c. high exposure to exchange rate fluctuations d. all of the above ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 5. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 6. Which of the following is a corporate characteristic that may affect an MNC’s capital structure decision? a. the MNC’s cash flow stability b. its access to retained earnings c. its credit risk d. All of the above may affect an MNC’s capital structure decision.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Comprehension 7. An MNC’s "global" capital structure is: a. the MNC’s capital structure in the United States. b. the MNC’s capital structure relative to the structures of competitors across all countries. c. the MNC’s capital structure where it has its largest subsidiary. d. the combination of the capital structures of the parent and all of its subsidiaries.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure KEYWORDS:

Bloom's: Knowledge

8. An MNC's "global" target capital structure is: a. always debt intensive. b. always equity intensive. c. sometimes different from the MNC's "local" capital structure (at a subsidiary). d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 9. One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the: a. parent’s managers and board of directors. b. parent and managers at the subsidiary who are minority shareholders. c. parent and existing creditors. d. subsidiary’s managers and creditors.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 10. One argument for why subsidiaries should be allowed to issue their own stock is that: a. it prevents a potential conflict of interests between the MNC's managers and shareholders. b. it prevents a potential conflict of interests between the MNC's majority shareholders and minority shareholders. c. it prevents a potential conflict of interests between the MNC's existing creditors. d. having local investors as minority shareholders may offer some protection against adverse actions by the local government.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 11. The cost of capital incurred by U.S.-based MNCs is primarily driven by global stock market volatility.

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Chapter 17: Multinational Cost of Capital and Capital Structure a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 12. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 13. Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure), and if their home countries are ____ likely to experience a recession. a. more; more b. less; more c. less; less d. more; less ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 14. Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan. a. higher; higher b. higher; lower c. lower; lower d. lower; higher ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 15. According to the text, the cost of debt in each country: a. is somewhat stable over time. b. changes over time, and these changes are negatively correlated among countries. c. changes over time, and these changes are positively correlated among countries. d. changes over time, and these changes are not correlated among countries.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 16. The term "local capital structure" is used in the text to represent the: a. average capital structure of local firms where the MNC's subsidiary is based. b. average capital structure of local firms where the MNC's parent is based. c. capital structure of a subsidiary of a particular MNC. d. capital structure of a particular MNC overall (including all subsidiaries).

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 17. Which of the following is not an external source of debt for an MNC? a. a private placement of bonds b. borrowing from a financial institution c. a domestic bond offering d. borrowing in the federal funds market ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure KEYWORDS:

Bloom's: Knowledge

18. An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 19. Assume that the risk-free interest rate in the United States is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M has the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital will likely be ____ than that of the U.S. firm. a. higher; higher b. higher; lower c. lower; lower d. lower; higher ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Application 20. When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant. a. increases; increases b. increases; is not affected c. is not affected; increases d. is not affected; is not affected ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 21. Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure capital for a domestic firm? a. the MNC’s exposure to exchange rate risk b. the MNC’s size c. the MNC’s access to international capital markets d. the MNC’s international diversification ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 22. According to your text, which of the following is not a factor that increases an MNC's cost of capital? a. higher exposure to exchange rate risk b. higher exposure to country risk c. an increase in the risk-free interest rate d. an increase in the size of the MNC ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 23. The ____ an MNC, the ____ its cost of capital is likely to be. a. larger; higher b. larger; lower c. smaller; lower d. A and C ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 24. Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock? a. 21 percent b. 41 percent c. 16 percent Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure d. 13 percent e. none of the above ANSWER: a RATIONALE: 5% + 2 (13% − 5%) = 21%.

POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Application 25. Which of the following is not a reason provided in the text for why the cost of debt can vary across countries? a. differences in the risk-free rate b. a high price-earnings multiple c. differences in the credit risk premium d. differences in demographics ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 26. In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates. a. more; low b. more; high c. less; low d. B and C e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 27. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure d. less; weak e. B and C ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 28. A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves. a. debt b. retained earnings c. short-term loans d. none of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 29. The ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows. a. lower; higher b. higher; higher c. lower; lower d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 30. 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. dependent on; more c. independent of; less d. independent of; more ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 31. In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods. a. more; narrower b. less; wider c. more; wider d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 32. According to the CAPM, the required rate of return on a stock is a positive function of all of the following, except: a. the risk-free rate of interest. b. the market rate of return. c. the stock's beta. d. the company's earnings.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 33. 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 POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.08 Bloom's: Knowledge

34. Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant. a. unsystematic; unsystematic b. unsystematic; systematic c. systematic; unsystematic d. systematic; systematic ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 35. Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____. a. higher; MNCs b. lower; domestic firms c. lower; MNCs d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 36. When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Comprehension 37. Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be: a. lower than its cost of equity. b. higher than its cost of equity. c. lower than the country's risk-free rate.

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Chapter 17: Multinational Cost of Capital and Capital Structure d. lower than its credit risk premium.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 38. Normally, each subsidiary of an MNC will issue its own stock where it does business. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 39. In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 40. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 41. Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure debt in many less developed countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 42. In the United States, government rescues of failing firms are not as common as they are in some other countries.

Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms in countries where government rescues are more common, everything else being equal. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 43. An MNC's cost of equity is unrelated to the local risk-free rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 44. Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.09 Bloom's: Comprehension

45. Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 46. Since the cost of funds can vary among markets, an MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 47. Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 48. An MNC with stable cash flows can probably handle more debt than an MNC with erratic cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 49. When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 50. There is an advantage to using equity rather than debt financing because dividend payments are tax deductible. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 51. An MNC's cost of capital may differ from that of domestic firms because of the MNC’s access to international capital markets, its exposure to exchange rate risk, and other characteristics. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 52. When a host country announces a plan to block funds remitted to the subsidiary’s parent, the subsidiary is likely to use a strategy of increasing local debt financing. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 53. The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 54. The cost of an MNC’s capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 55. It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 56. It is probably easier to estimate the cost of equity than it is to estimate the cost of debt. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Comprehension 57. When a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ______ price, so the firm incurs a _____ cost of equity. a. low; low b. low; high c. high; high d. high; low ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 58. If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Comprehension 59. Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project. a. higher; higher b. lower; higher c. higher; lower d. B and C e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 60. The capital asset pricing model suggests that the required return on a firm's stock is a positive function of: a. the risk-free rate of interest. b. the market rate of return. c. the stock's beta. d. all of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Knowledge 61. Which of the following is not a source of equity for an MNC? a. retained earnings b. a global equity offering c. a domestic equity offering d. All of the above are sources of equity for an MNC. ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 62. Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital? a. 10.8 percent b. 12.4 percent c. 9.2 percent d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure 63. The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity? a. 8.4 percent b. 11.4 percent c. 10.0 percent d. None of the above ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.08 KEYWORDS: Bloom's: Application 64. Which of the following is least likely to influence an MNC's capital structure? a. stability of the MNC's cash flows b. the MNC's credit risk c. the MNC's access to earnings d. the MNC's decision to invest excess cash in a Treasury bill rather than in a bank ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 65. Which of the following is not a host country characteristic than can affect an MNC's capital structure decision? a. the strength of the host country currency b. the country risk in the host country c. political decisions to increase penalties for criminals in the host country d. tax laws in the host country ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 66. If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____. a. does not back; increased b. backs; reduced c. does not back; reduced Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Multinational Cost of Capital and Capital Structure d. backs; increased e. C and D ANSWER: e POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 67. ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need. a. Private placements b. Domestic equity offerings c. Global equity offerings d. Global debt offerings ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge 68. Most MNCs obtain equity funding: a. in foreign countries. b. in their home country. c. through global offerings. d. through private placements.

ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.09 KEYWORDS: Bloom's: Knowledge

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Chapter 18: Long-Term Debt Financing 1. If an MNC finances with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that: a. exhibits a low interest rate and is expected to appreciate. b. exhibits a low interest rate and is expected to depreciate. c. exhibits a high interest rate and is expected to depreciate. d. exhibits a high interest rate and is expected to appreciate.

ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by: a. invoicing its exports in U.S. dollars. b. requesting that any imports ordered by the firm be invoiced in U.S. dollars. c. invoicing its exports in euros. d. requesting that any imports ordered by the firm be invoiced in euros.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 4. Lantana Co. pays for many imports denominated in Canadian dollars. It is a major exporter to France and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in: a. U.S. dollars. b. euros. c. Canadian dollars d. none of the above ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. Simulation is useful in the debt denomination decision since it can: a. precisely compute the cost of financing with debt denominated in a single foreign currency. b. precisely compute the cost of financing with debt denominated in a portfolio of foreign currencies. c. assess the probability that debt denominated in a foreign currency will be less costly than debt denominated in the home currency. d. A and B ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 6. An interest rate swap between two firms of different countries enables the exchange of ____ for ____. a. fixed-rate payments; floating-rate payments b. stock; interest deductions on taxes c. interest payments on loans; ownership of debt of less developed countries d. interest payments on loans; stock ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____. a. a foreign currency; weakens b. dollars; strengthens c. a foreign currency; strengthens d. dollars; weakens ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. The yields offered on newly issued bonds tend to be: a. lower in less developed countries where labor costs are low. b. relatively high in countries such as Japan and the United States because the credit risk premium is much higher there than in other countries.

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Chapter 18: Long-Term Debt Financing c. the same across countries at a given point in time. d. none of the above ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 9. A U.S. firm receives a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the United States. It could best reduce its exposure to exchange rate risk by: a. issuing Swiss franc–denominated bonds. b. purchasing Swiss franc–denominated bonds. c. purchasing U.S. dollar–denominated bonds. d. issuing U.S. dollar–denominated bonds.

ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 10. A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing: a. U.S. dollars. b. Canadian dollars. c. Chinese yuan. d. a combination of Canadian dollars and Chinese yuan.

ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 11. If an MNC issues bonds denominated in a foreign currency and that currency depreciates against the MNC’s home currency, the funds needed to make coupon payments will increase. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing KEYWORDS:

Bloom's: Comprehension

12. An interest rate swap is commonly used by an issuer of fixed-rate bonds to: a. convert to floating-rate payments. b. hedge exchange rate risk. c. lock in the interest payments on its debt. d. eliminate the credit risk of its debt.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals. a. stock; one currency b. stock; a portfolio of foreign currencies c. one currency; stock options d. one currency; another currency ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 14. Assume a U.S.-based subsidiary wants to raise $1 million by issuing a bond denominated in Pakistani rupees (PKR).

The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1 million needed. a. 50,000,000 b. 20,000 c. 1,000,000 d. none of the above ANSWER: a $1,000,000/$.02 = PKR50,000,000 RATIONALE: DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 15. An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bonds have a coupon rate of 15 percent. If the peso remains stable at its current level of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be: a. 10.0 percent. b. 12.5 percent.

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Chapter 18: Long-Term Debt Financing c. 15.0 percent. d. none of the above ANSWER: RATIONALE:

c Since the bonds are issued at par, and since the exchange rate remains stable over the life of the bonds and the bonds are held until maturity, the financing cost will be exactly the coupon rate of the bond.

DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 16. New Hampshire Corp. has decided to issue three-year bonds denominated in 5 million Russian rubles at par. The bonds have a coupon rate of 17 percent. If the ruble is expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years 1, 2, and 3, respectively, what is the financing cost of these bonds? a. 17 percent. b. 23.18 percent. c. 22.36 percent. d. 23.39 percent.

ANSWER: d RATIONALE: Annual Cost of Year 1 Year 2 Year 3 Financing Payments in rubles 850,000 850,000 5,850,000 Forecasted exchange rate $.032 $.034 $.035 of ruble Payments in dollars $27,200 $28,900 $204,750 23.39% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 17. In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____ swap, two parties agree to periodically exchange foreign currencies. a. interest rate; currency b. currency; interest rate c. interest rate; interest rate d. currency; currency ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing 18. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume that Good and Bad Companies could issue bonds as follows: Fixed Rate Bond Variable Rate Bond Good Company 10% LIBOR + 1% Bad Company 12% LIBOR + 1.5% a. an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company. b. an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1 percent in exchange for fixed rate payments of 10.5 percent. c. an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1 percent in exchange for fixed rate payments of 10.5 percent. d. none of the above ANSWER: b DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 19. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest rates ____ substantially. a. floating-rate; rise b. floating-rate; fall c. fixed-rate; rise d. fixed-rate; fall e. none of the above ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 20. Parallel loans are particularly attractive when an MNC is conducting a project in a foreign country, will receive cash flows in the foreign currency, and is concerned that the foreign currency will depreciate substantially. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 21. An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is: Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing a. flat. b. inverted. c. upward sloping. d. downward sloping.

ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. If an MNC borrows funds in a foreign currency and that currency appreciates over time, the MNC will need fewer funds to cover the coupon or principal payments. [Assume the MNC has no other cash flows in that currency.] a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 23. A U.S.-based MNC whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary's local currency. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries are ____. a. low; high b. high; low c. high; high d. none of the above ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing 25. MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future. a. forward contracts b. currency swaps c. parallel loans d. none of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 26. A(n) _____ yield curve for a country means that annualized yields there are ____ for short-term debt than for longterm debt. a. upward-sloping; higher b. flat; lower c. downward-sloping; lower d. upward-sloping; lower ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 27. The ____ for a given country represents the annualized yield offered on debt for various maturities. a. LIBOR b. yield curve c. parallel loan d. interest rate swap ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 28. When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk. a. interest rate b. credit c. exchange rate d. none of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. Some MNCs use a country's yield curve to compare annualized rates among debt maturities, so that they can choose a maturity that has a relatively low rate. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. When a financial institution acts as a(n) ____ to an interest rate swap, it simply arranges a swap between two parties. a. ultraparty b. Broker c. counterparty d. none of the above ANSWER: b 31. In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____. a. fixed; decline b. floating; decline c. floating; increase d. none of the above ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 32. In a(n) ____ swap, the fixed rate payer has the right to terminate the swap. a. callable b. putable c. amortizing d. zero-coupon ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. In a(n) ____ swap, the notional value is increased over time. a. amortizing b. Basis c. zero-coupon d. accreting ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. A ____ gives its owner the right to enter into a swap. a. basis swap b. swaption c. callable swap d. putable swap ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 36. If a U.S.-based MNC issues a bond denominated in euros, the actual financing cost is affected by the euro's value relative to the U.S. dollar during the financing period. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 37. A floating coupon rate is an advantage to the bond issuer during periods of increasing interest rates. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 38. An MNC issuing pound-denominated bonds may be completely insulated from exchange rate risk associated with the bond if its foreign subsidiary makes the coupon and principal payments of the bond with its pound receivables. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 39. If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros, it would sell euros forward. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 40. Currency swaps, whereby two parties exchange currencies at a specified point in time for a specified price, are often used by MNCs to hedge against interest rate risk. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing KEYWORDS:

Bloom's: Comprehension

41. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparty could default on its payments. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 42. When estimating the cost of debt financing for a subsidiary, an MNC can use sensitivity analysis and simulation to account for the uncertainty surrounding forecasted exchange rates. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 44. Since yield curves are identical across countries, MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing 45. Fixed-rate loans have interest rates that are fixed for one year but adjust at the end of each year in response to prevailing interest rates. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 46. The global trade association that is credited with helping to standardize the swaps market is called the International Monetary Fund. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 47. Even if a foreign interest rate is higher than an MNC’s domestic interest rate, the financing costs of issuing a bond denominated in the foreign currency will always be lower than the financing cost of a domestic bond as long as the currency depreciates over the lifetime of the bond. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 48. If the currency of a foreign currency–denominated bond ____, the funds needed to make coupon payments will ____. a. appreciates; increase b. depreciates; decrease c. appreciates; decrease d. depreciates; increase e. A and B ANSWER: e DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing KEYWORDS:

Bloom's: Comprehension

49. Generally, the financing costs associated with a foreign currency–denominated bond will be ____ volatile than the financing costs of a domestic bond because of ____. a. more; exchange rate movements b. less; exchange rate movements c. less; global economic conditions d. none of the above ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 50. ____ swaps are often used by companies to hedge against ____ rate risk. a. Currency; interest b. Interest rate; interest c. Interest rate; exchange d. Currency; exchange e. B and D ANSWER: e DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 51. ____ are commonly used to hedge interest rate risk. a. Currency swaps b. Parallel loans c. Interest rate swaps d. Forward contracts e. None of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. In a(n) ____ swap, the notional value is reduced over time. a. accreting b. Amortizing c. Forward Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Long-Term Debt Financing d. zero-coupon e. Putable ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 53. A(n) ____ swap is entered into today, but the swap payments start at a specific future point in time. a. accreting b. Amortizing c. Forward d. zero-coupon e. Putable ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge

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Chapter 19: Financing International Trade 1. Which of the following is a reason why commercial banks may facilitate international trade? a. The exporter may not wish to accept the credit risk of the importer. b. The government may impose foreign exchange controls that prevent payment by the importer to the exporter. c. The exporter may need financing until payment for the products is received. d. All of the above ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. Consider an exporter that sells its accounts receivables to another firm that becomes responsible for obtaining payment from the various importers. This reflects: a. accounts receivable financing. b. consignment. c. factoring. d. a letter of credit.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. Consider a bank that acknowledges that it will make payment on behalf of a computer importer after the bank receives documents showing that the computers have been shipped to the importer. This reflects: a. accounts receivable financing. b. forfaiting. c. factoring. d. a letter of credit.

ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 4. Consider an importer that issues a promissory note to an exporter to pay for imported capital goods over a period of five years. The exporter sells the note at a discount to a bank. This reflects: a. accounts receivable financing. b. forfaiting.

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Chapter 19: Financing International Trade c. factoring. d. a letter of credit.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. Consider an exporter that ships products to an importer on credit. The exporter needs funds immediately, so it obtains a loan from a bank using the account receivable as collateral. This reflects: a. accounts receivable financing. b. forfaiting. c. factoring. d. a letter of credit.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. The all-in rate a bank charges for a banker’s acceptance includes both the interest rate and the acceptance commission. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 7. MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash. a. factoring b. a bill of lading c. a banker's acceptance d. a letter of credit ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 8. The ____ was established in 1934 with the intention to facilitate Soviet-American trade. a. Domestic International Sales Corporation (DISC) b. Private Export Funding Corporation (PEFCO) c. Export-Import Bank d. Foreign Credit Insurance Association (FCIA) ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9. A ____ provides a summary of freight charges and conveys title to the merchandise in an international shipment. a. letter of credit b. banker's acceptance c. bill of lading d. bill of exchange ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 10. According to the text, international trade activity has generally ____ over time. This should cause the popularity of trade finance techniques to ____ over time. a. increased; increase b. increased; decrease c. decreased; increase d. decreased; decrease ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 11. Which of the following payment terms provides the exporter with the greatest degree of protection?

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Chapter 19: Financing International Trade a. letters of credit. b. consignment. c. prepayment. d. drafts (sight/time).

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 12. With ____, the exporter ships the products to the importer while still retaining actual title to the merchandise; the importer does not have to pay for the products until they have been sold to a third party. a. a letter of credit arrangement b. an open account arrangement c. a draft arrangement d. a consignment arrangement ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 13. When an exporter sells an account receivable to a factor, the factor will attempt to collect payment from the importer, but if the importer is unable to pay, the factor can collect the payment from the exporter. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 14. With ____, the importer’s bank promises to pay the exporter if the importer fails to pay as agreed. a. a standby letter of credit b. a bill of exchange c. forfaiting d. accounts receivable financing ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 15. When products are shipped under a _______, the exporter is paid once the shipment is made and the draft is presented to the importer for payment. a. consignment arrangement b. time draft c. prepayment arrangement d. sight draft ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 16. When products are shipped under a ______, the importer that accepts the draft is promising to pay the exporter at a specified future date. a. prepayment arrangement b. time draft c. counterpurchase arrangement d. sight draft ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 17. An exchange of products between two parties under two distinct contracts expressed in monetary terms is: a. compensation. b. counterpurchase. c. factoring. d. accounts receivable financing.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. Which of the following is not a program of the Export-Import Bank of the United States? a. Working Capital Guarantee Program b. Project Finance Loan Program c. Direct Loan Program d. Foreign Sales Corporation Program ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. Who is obligated to make payment once proof of shipment of goods is documented in a letter of credit? a. the exporter b. the importer c. the importer’s bank d. The importer’s government.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 20. All types of foreign trade transactions in which the sale of products to one country is linked to the purchase or exchange of products from that same country are called countertrade. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 21. The exchange of products between two parties without the use of any currency as a medium of exchange is called factoring. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. A time draft that is issued by a firm and guaranteed by a bank is called a banker's acceptance. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 23. The Direct Loan Program is administered by the: a. Private Export Funding Corporation (PEFCO). b. Overseas Private Investment Corporation (OPIC). c. Ex-Im Bank. d. Foreign Credit Insurance Association (FCIA).

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 24. The Working Capital Guarantee Program is administered by the: a. Private Export Funding Corporation (PEFCO). b. Overseas Private Investment Corporation (OPIC). c. Ex-Im Bank. d. Foreign Credit Insurance Association (FCIA).

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade KEYWORDS:

Bloom's: Knowledge

25. Which of the following is not a payment method used for international trade? a. consignment b. open account. c. factoring d. draft e. letter of credit ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 26. Under a letter of credit (L/C) arrangement, the ______issues the L/C and sends it to the ____ . a. importer’s government; exporter’s government b. importer’s bank; exporter’s bank c. exporter’s government; importer’s government d. exporter’s bank; exporter’s government ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 27. Which of the following is not a document that might be included in the documents for an international shipment under a letter of credit? a. an ocean bill of lading b. an airway bill c. a commercial invoice d. a bill of lading e. a barter notification ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 28. Which of the following is not true regarding letters of credit?

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Chapter 19: Financing International Trade a. A letter of credit is a written commitment by the importer’s bank on the importer’s behalf promising to pay the exporter when it presents documents showing that the products have been shipped. b. The letters of credit used in international trade are irrevocable. c. Letters of credit guarantee that the products shipped are the products purchased. d. All of the above are true.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. A banker's acceptance is a time draft that is issued by a firm and guaranteed by a(n) ____. a. bank b. importer c. exporter d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 30. Which of the following is not true regarding a banker's acceptance? a. The exporter benefits because it does not have to worry about the credit risk of the importer. b. The importer benefits because it obtains greater access to foreign markets when purchasing supplies. c. The bank guaranteeing the draft earns a commission for creating an acceptance. d. It is a sight draft. e. All of the above are true.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. ____ is(are) not a type of program offered by the Ex-Im Bank. a. Guarantees b. Loans c. Currency swap insurance Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade d. Bank insurance ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. As part of the Ex-Im Bank's export credit insurance programs, a(an) ____ Policy is generally issued to an administrator, such as a bank, trading company, insurance broker, or government agency, which then administers the policy for multiple exporters. a. Multibuyer b. Single-Buyer c. Small Business d. Umbrella ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 33. The ____ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ____ is a self-sustaining government agency. a. Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO) b. Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC) c. Private Export Funding Corporation (PEFCO); Ex-Im Bank d. Overseas Private Investment Corporation (OPIC); Ex-Im Bank ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. The risk to the exporter is highest with the ____ payment method. a. prepayment b. letter of credit c. sight draft d. open account ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. A ____ is a written order from the exporter instructing the importer to pay the face amount either upon presentation or at a specified future date. a. draft b. bill of lading c. compensation guarantee d. letter of credit ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. Syndicates of banks may be involved in forfaiting transactions because these transactions are usually in excess of $500,000. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. In a ________ or clearing-account arrangement, the delivery of products to the importer is compensated for by the exporter’s buying back a certain amount of the product from the importer. a. accounts receivable financing b. compensation c. counterpurchase d. barter ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade 38. An irrevocable letter of credit cannot be amended or canceled without the exporter’s consent. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 39. The time period of most time drafts ranges from a. 30 days to 180 days. b. 2 weeks to 52 weeks. c. 1 year to 5 years. d. 10 days to 60 days.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 40. The commission that a bank charges for a banker's acceptance is referred to as the all-in rate; it is the only cost involved in an acceptance. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. ____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, from the original holder, usually the exporter; the obligations are sold “without recourse,” meaning that if the importer does not pay, the exporter has no responsibility for their payment. a. Factoring b. Accounts receivable financing c. Forfaiting d. None of the above ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 42. The term counterpurchase denotes the exchange of products between two parties under two distinct contracts expressed in monetary terms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 43. Under a letter of credit, the exporter will not ship the products until the importer has sent payment to the exporter. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 44. In an open account transaction, the exporter ships the products to the importer but retains title to the products until they have been sold. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 45. In factoring, a bank provides an exporter with a loan that is secured by the exporter’s accounts receivable. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 46. A bank will be willing to create a letter of credit on behalf of an importer only if it trusts the importer’s creditworthiness. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 47. There is an active secondary market for banker's acceptances. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 48. The commission earned by the bank for creating a banker’s acceptance is reflected in the all-in rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 49. The Working Capital Guarantee Program of the Private Export Funding Corporation (PEFCO) encourages commercial banks to extend short-term export financing to eligible exporters by providing a comprehensive guarantee that covers 100 percent of the loan's principal and interest.

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Chapter 19: Financing International Trade a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 50. Most of the programs of the Export-Import Bank of the United States are designed to encourage private lenders to finance export trade by assuming some of the credit risk and providing financing to foreign importers when private lenders are unwilling to do so. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 51. The Overseas Private Investment Corporation (OPIC) is owned by a consortium of commercial banks and industrial companies; it cooperates closely with the Export-Import Bank. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 52. Under prepayment, the exporter will not ship the products until the exporter has received payment from the importer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade 53. A letter of credit does not guarantee that the products shipped will be those described in the documents. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 54. If shipment is made under a forfaiting draft, the exporter is paid once shipment has been made and the draft is presented to the importer for payment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 55. In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping documents and the collection of payment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 56. Under a countertrade arrangement, the exporter ships the products to the importer while retaining title to the merchandise until it is sold. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

57. Factoring involves the sale of accounts receivable to a third party, called a factor, for a discount. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 58. Cross-border factoring involves a network of factors in various countries that assess importers’ credit risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 59. The payment method that affords the exporter the greatest degree of protection is the prepayment method. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 60. A bank issuing a letter of credit on behalf of an importer is obligated to make the payment due under the letter of credit regardless of the importer’s willingness or ability to pay. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

61. If shipment is made under a time draft, the exporter is paid as soon as the products have been shipped and the draft is presented to the importer for payment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 62. Which of the following would not be included in a bill of lading? a. the names of the exporter and importer b. the terms of payment c. the date of shipment d. All of the above would be included in a bill of lading.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 63. Which of the following would be included in a commercial invoice? a. the names of the exporter and importer b. the price of the merchandise c. the terms of payment d. All of the above would be included in a commercial invoice.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 64. An importer always has the option to cancel an irrevocable letter of credit. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Financing International Trade POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 65. A bill of exchange serves as a receipt for shipment and a summary of freight charges; most importantly, it conveys title to the merchandise. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 66. The all-in rate charged on banker’s acceptances is higher than the rate that a bank would charge a creditworthy borrower for a regular loan. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 20: Short-Term Financing 1. MNCs may be able to lock in a lower cost by financing in a low-interest rate foreign currency if they have: a. future cash inflows in that foreign currency. b. future cash outflows in that foreign currency. c. offsetting future cash inflows and outflows in that foreign currency. d. no other cash flows in that foreign currency.

ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 2. Assume that the Swiss franc has an annual interest rate of 8 percent and is expected to depreciate by 6 percent against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is: a. 8 percent. b. 14.48 percent. c. 2 percent. d. 1.52 percent.

ANSWER: d RATIONALE: (1 + 8%)[1 + (−6%)] − 1 = 1.52%.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 3. Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars. a. depreciate; about 3.74 percent b. appreciate; about 3.74 percent c. appreciate; about 4.53 percent d. depreciate; about 4.53 percent ANSWER: b RATIONALE: (1.11/1.07) − 1 = 3.74%. The euro to appreciate since borrowing in euros is currently cheaper.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing 4. When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____. a. foreign currency's interest rate; appreciates b. foreign currency's interest rate; depreciates c. domestic interest rate; depreciates d. domestic interest rate; appreciates ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by: a. borrowing domestically. b. borrowing a portfolio of foreign currencies that are not highly correlated. c. borrowing a portfolio of foreign currencies that are highly correlated. d. borrowing two foreign currencies that are negatively correlated.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is ____. a. high; low b. high; high c. low; low d. low; high ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 7. Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound's forward rate of $1.75 equals the pound's spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower financing cost by borrowing pounds for one year.

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Chapter 20: Short-Term Financing a. does; could b. does; could not c. does not; could not d. does not; could ANSWER: c POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. A risk-averse firm would prefer to borrow ____ when the expected financing costs in a foreign country are similar to the costs in the local country. a. locally b. in the foreign country c. either A or B d. part of the funds locally, and part from the foreign country ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 9.

A firm forecasts the euro's value as follows for the next year: Possible Percentage Change Probability 10% −2% 3% 50% 6% 40% The annual interest rate on the euro is 7 percent. The expected value of the effective financing rate from a U.S. firm's perspective is about: a. 8.436 percent. b. 10.959 percent. c. 11.112 percent. d. 11.541 percent.

ANSWER: b RATIONALE: Computation of Effective Financing Rate Probability Expected Value = 4.86% 10% .486% (1.07)( .98) − 1 = 10.21% 50% 5.105% (1.07)(1.03) − 1 = 13.42% 40% 5.368% (1.07)(1.06) − 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing 10.959% POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 10. The effective financing rate of financing in a foreign currency depends on the ______ over the loan period and the ______ over the loan period. a. interest rate of the domestic currency; percentage change in the value of the foreign currency b. interest rate of the foreign currency; percentage change in the value of the foreign currency c. interest rate of the foreign currency; percentage change in inflation d. interest rate of the domestic currency; percentage change in inflation ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 11. If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is: a. lower than the domestic interest rate. b. higher than the domestic interest rate. c. similar to the domestic interest rate. d. highly variable.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. If interest rate parity exists and the forward rate is expected to overestimate the future spot rate, then uncovered foreign financing is expected to result in an effective financing rate that will be: a. similar to the U.S. financing rate. b. lower than the U.S. financing rate. c. higher than the U.S. financing rate. d. lower than the U.S. interest rate if the forward rate exhibits a discount and higher than the U.S. interest rate if the forward rate exhibits a premium.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 13. Assume the U.S. one-year interest rate is 8 percent, and the British one-year interest rate is 6 percent. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan? a. about 12.4 percent b. about 7.1 percent c. about 13.5 percent d. about 10.3 percent e. about 11.4 percent ANSWER: a RATIONALE: Effective financing rate = (1 + 6%)(1 + 5.1%) − 1 = 11.4% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 14. When an MNC borrows in two foreign currencies with lower interest rates than the U.S. rate, the portfolio will have a higher effective financing rate than a loan in U.S. dollars if both currencies depreciate simultaneously against the dollar. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. Euronotes are underwritten by: a. European central banks. b. commercial banks. c. the International Monetary Fund. d. the Federal Reserve System.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 16. Assume the U.S. interest rate is 7.5 percent, the New Zealand interest rate is 6.5 percent, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan? a. about −1.7 percent b. about 0.0 percent c. about 14.7 percent d. about 15.4 percent e. about 8.3 percent ANSWER: a RATIONALE: Effective financing rate = (1 + 6.5%)[1 + (−7.7%)] − 1 = about −1.7% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 17. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these foreign countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been: a. negative b. zero c. positive, but lower than the interest rate of their respective countries. d. higher than the interest rate of their respective countries.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 18. Which of the following is not a source of external short-term financing for MNCs? a. Eurobonds b. Euro-commercial paper Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing c. Euronotes d. ADRs e. A and D ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 19. Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7 percent. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and the MNC needs $____ to repay the loan. a. 375,000; 449,400 b. 449,400; 375,000 c. 6,000,000; 5,357,143 d. 5,357,143; 6,000,000 ANSWER: a RATIONALE: MYR1,500,000 × $.25 = $375,000 (MYR1,500,000 × 1.07) × $.28 = $449,400 POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 20. Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen? a. 37.8 percent b. 51.43 percent c. −25.8 percent d. −6 percent e. none of the above ANSWER: c RATIONALE: Depreciation of the yen: $.0035/$.005 − 1 = −30% Effective financing rate: (1.06) × [1 + (−30%)] − 1 = −25.80%.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Application

21. The interest rates on Euronotes are based on: a. the prime lending rate. b. the euro’s spot rate. c. the federal funds rate. d. LIBOR. ANSWER: d POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Assume a U.S.-based MNC is borrowing Romanian leu at an interest rate of 8 percent for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu oneyear from now is $.00011.

22. Refer to Exhibit 20-1 above. What is the effective financing rate for the MNC assuming that it borrows leu on a covered basis? a. 10 percent b. −10 percent c. −1 percent d. 1 percent e. none of the above ANSWER: b RATIONALE: Forward discount: .00010/.00012 − 1 = −16.67% Effective financing rate: (1.08) × [1 + (−16.67%)] −1 = −10.00%.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 23. Refer to Exhibit 20-1 above. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis? a. about 10 percent b. about −10 percent c. about −1 percent d. about −2 percent e. none of the above ANSWER:

d

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Chapter 20: Short-Term Financing RATIONALE:

Depreciation of leu: .00010/.00011 − 1 = −9.09% Effective financing rate: (1.08) × [1 + (−9.09%)] − 1 = −1.82%.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 24. Assume that interest rate parity holds between the United States and Japan. The U.S. one-year interest rate is 7 percent, and Japan’s one-year interest rate is 6 percent. What is the approximate effective financing rate of a one-year loan denominated in Japanese yen assuming that the MNC covered its exposure by purchasing yen one year forward? a. 6 Percent b. 7 Percent c. 1 Percent d. cannot answer without more information ANSWER: b When interest rate parity holds, the foreign financing cost (when covering with a forward RATIONALE: hedge) is approximately equal to the domestic financing cost.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 25.

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year: Percentage Change Probability of Occurrence 20% −5% 50% −3% 1% 30% If the Russian interest rate is 30 percent, the expected cost of financing a one-year loan in rubles is: a. 27.14 percent. b. 32.86 percent. c. 26.10 percent. d. none of the above ANSWER: a RATIONALE: Computation of Effective Financing Rate Probability Expected Value = 23.50% 20% 4.70% (1.30)( .95) − 1 = 26.10% 50% 13.05% (1.30)( .97) − 1 = 31.30% 30% 9.39% (1.30)(1.01) − 1 27.14% Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Luzar Corporation decides to borrow 50 percent of funds needed in Canadian dollars and the remainder in yen. The U.S. (domestic) financing rate for a one-year loan is 7 percent. The Canadian one-year interest rate is 6 percent, and the Japanese one-year interest rate is 10 percent. Luzar has determined the following possible percentage changes in the two individual currencies as follows: Currency Canadian dollar Canadian dollar Japanese yen Japanese yen

Percentage Change 2.0% 4.0% −3.0% 1.0%

Probability 30% 70% 60% 40%

26. Refer to Exhibit 20-2 above. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)? a. 9.03 percent b. 7.00 percent c. 10.00 percent d. 7.59 percent e. none of the above ANSWER: a RATIONALE: Step 1. Determine the effective financing rate for each currency under each possible scenario.

Step 2.

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Currency Canadian dollar Canadian dollar

Percentage Change 2.0% 4.0%

Probability 30% 70%

Effective Rate (1.06)(1.02) − 1 = 8.12% (1.06)(1.04) − 1 = 10.24%

Japanese yen Japanese yen

−3.0% 1.0%

60% 40%

(1.10)( .97) − 1 = 6.70% (1.10)(1.01) − 1 = 11.10%

Determine joint probabilities and effective financing rate of portfolio for each scenario.

Canadian Dollar 8.12%

Japanese Yen 6.70%

Joint Probability (.3)(.6) = .18

8.12%

11.10%

(.3)(.4) = .12

10.24%

6.70%

(.7)(.6) = .42

10.24%

11.10%

(.7)(.4) = .28

Portfolio Effective Rate (.5)( 8.12%) + (.5)( 6.70%) = 7.41% (.5)( 8.12%) + (.5)(11.10%) = 9.61% (.5)(10.24%) + (.5)( 6.70%) = 8.47% (.5)(10.24%) + (.5)(11.10%) = 10.67% Page 10

Chapter 20: Short-Term Financing 1.00

Step 3.

Determine effective financing rate of portfolio. (.18)(7.41%) + (.12)(9.61%) + (.42)(8.47%) + (.28)(10.67%) = 9.03%

POINTS: 1 DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 27. Refer to Exhibit 20-2 above. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate? a. 12 Percent b. 30 Percent c. 100 Percent d. 0 Percent e. none of the above ANSWER: d Since the domestic financing rate is 7%, the table above shows that there is no possibility RATIONALE: that foreign financing with the portfolio of currencies is cheaper than domestic financing.

POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 28. If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing a. premium; higher than b. discount; higher than c. premium; less than d. A and B ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. Assume the U.S. one-year interest rate is 9 percent, while the Chilean one-year interest rate is 13 percent. If the Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing Chilean peso ____ by ____ percent, a U.S.-based MNC would incur the same financing cost in dollars as in Chilean pesos over a one-year period. a. depreciates; 3.54 b. appreciates; 3.54 c. depreciates; 3.67 d. appreciates; 3.67 ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge). a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 33. One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 34. A negative effective financing rate implies that the U.S. firm actually paid less to repay the loan than it borrowed. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 36. The interest rate of Euronotes is based on the T-bill rate. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 37. Countries with a ____ rate of inflation tend to have a ____ interest rate. a. high; low b. low; high c. high; high d. A and B are correct ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 38. Kushter Inc. would like to finance in euros. European interest rates are currently 4 percent, and the euro is expected to depreciate by 2 percent over the next year. What is Kushter's effective financing rate next year? a. 1.92 percent b. 2.00 percent c. 6.08 percent d. none of the above ANSWER: a RATIONALE: (1.04)(.98) − 1 = 1.92% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 39. A negative effective financing rate indicates that an MNC: a. paid only a small amount in interestover and above the amount borrowed. b. has been negatively affected by a large appreciation of the foreign currency. c. actually paid fewer dollars to repay the loan than it borrowed. d. would have been better off borrowing in the United States.

ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

40. If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate. a. lower than b. greater than c. similar to d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 41. If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. a. lower than b. greater than c. similar to d. none of the above ANSWER: c POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 42. Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. The expected cost of financing in dollars and financing in euros next year would be the same if the euro is expected to ____. a. appreciate by 0.92 percent b. depreciate by 0.92 percent c. appreciate by 1.00 percent d. depreciate by 1.00 percent ANSWER: a RATIONALE: 1.10/1.09 − 1 = 0.92% POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing 43. To avoid exchange rate risk when borrowing a foreign currency, an MNC could hedge its position by using interest rate swaps. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 44. When a U.S. firm borrows a foreign currency that is at a fixed exchange rate and has the same interest rate as the U.S. interest rate, the effective financing rate should be the same as if it borrowed dollars. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 45. An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 46. A large firm may finance in a foreign currency to offset a net payable position in that foreign country. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

47. If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.06 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 48. Which of the following is a scenario under which a U.S.-based MNC probably would not consider short-term foreign financing? a. Canadian dollars offer a lower interest rate than is available in the United States and are expected to appreciate over the maturity of the loan. b. Australian dollars offer a lower interest rate than is available in the United States and are expected to depreciate over the maturity of the loan. c. The MNC has net receivables in British pounds. d. A and C e. None of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Analysis 49. Which of the following statements is false? a. If interest rate parity holds, foreign financing and a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing. b. If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing. c. If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing. d. If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.20.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Short-Term Financing NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension

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Chapter 21: International Cash Management 1. The Mexican one-year interest rate is 9 percent, while the U.S. one-year interest rate is 3 percent. Assume that interest rate parity exists. If a U.S. firm uses the forward rate to forecast the exchange rate of the peso in one year, the expected effective yield from investing in a one-year deposit in Mexico is: a. 12 percent. b. 9 percent. c. 3 percent. d. 6 percent.

ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 2. Assume that Subsidiaries X and Y of the same MNC often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help out Subsidiary Y? a. X should lag its payments sent to Y to pay for imports from Y. b. X should request that Y lead its payments to be sent for goods that Y sent to X. c. A and B d. None of the above ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 3. Netting can achieve all but one of the following: a. Cross-border transactions between subsidiaries are reduced. b. Transaction costs are reduced. c. Currency conversion costs are reduced. d. Transaction exposure is eliminated.

ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 4. Which of the following is true? a. Some countries may prohibit netting. b. Some countries may prohibit forms of leading and lagging. c. A and B d. None of the above ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 5. According to the text: a. banks in the United States are prohibited from facilitating cash transfers for MNCs. b. banks in most non-U.S. countries are more advanced than those in the United States in facilitating cash transfers for MNCs. c. an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists. d. none of the above ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 6. In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 7. The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about: a. 9 percent. b. 7 percent. c. 4 percent. d. 2 percent.

ANSWER: d DIFFICULTY: Easy NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 8. Assume that a U.S. investor invests in a British CD offering a six-month interest rate of 5 percent. Over this six-month period, the pound depreciates by 9 percent. The effective yield on the British CD for the U.S. investor is: Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management a. 14.45 percent. b. 4.45 percent. c. 14.00 percent. d. 4.00 percent.

ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 9. Assume that there are several foreign currencies that exhibit a higher interest rate than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher effective yield on a portfolio of currencies (relative to the domestic yield) if: a. the foreign currency movements against the U.S. dollar are highly correlated. b. the foreign currency movements against the U.S. dollar are perfectly positively correlated. c. the foreign currency movements against the U.S. dollar exhibit low correlations. d. none of the answers above would have any impact on the probability of a foreign cash investment generating a higher effective yield than a U.S. investment.

ANSWER: c DIFFICULTY: Moderate NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 10. If the international Fisher effect (IFE) exists, then a U.S. firm that has access to banks offering high interest rates in deposits denominated in foreign currencies should: a. invest in the foreign deposits since they will, on average, generate higher effective yields than a U.S. deposit. b. invest in the U.S. deposits since they will, on average, generate higher effective yields than a foreign deposit. c. invest in the U.S. deposits since they will, on average, generate similar effective yields as a foreign deposit. d. invest in the foreign deposits since they will, on average, generate similar effective yields as a U.S. deposit.

ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 11. The most useful measure of an MNC's liquidity is its: a. cash balance b. amount of securities held as investments. c. political risk rating. d. potential access to funds.

ANSWER: d DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 12. Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the international Fisher effect will also hold. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 13. According to the international Fisher effect: a. exchange rates adjust to compensate for income differentials between countries. b. interest rates adjust to compensate for income differentials between countries. c. exchange rates adjust to compensate for interest rate differentials between countries. d. exchange rates adjust to compensate for risk differentials between countries.

ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 14. The international Fisher effect suggests that: a. the effective yield on short-term foreign securities should, on average, equal the yield on short-term domestic securities. b. the effective yield on short-term securities of high-inflation countries is greater than the yield on short-term domestic securities. c. if domestic income grows faster than foreign income, the effective yield on short-term foreign securities is higher than the yield on short-term domestic securities. d. if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.

ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. If a foreign currency consistently depreciated against the dollar over several periods and had lower interest rates at the beginning of those periods than the U.S. interest rates, then: Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management a. U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those periods. b. the international Fisher effect is supported by the results. c. A and B d. none of the above ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 16. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 17. A common purpose of intersubsidiary leading or lagging strategies is to: a. allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds. b. assure that the inventory levels at subsidiaries are maintained within tolerable ranges. c. change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary. d. measure the performance of subsidiaries according to how quickly subsidiaries remit dividend payments to the parent.

ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 18. Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these securities is 12 percent, while the U.S. interest rate on the same securities is 10 percent. The firm believes that today's spot rate is an appropriate forecast for the spot rate of the pound in one year. Based on this information, the effective yield on British securities from the U.S. firm's perspective is: a. equal to the U.S. interest rate. b. equal to the British interest rate. c. lower than the U.S. interest rate. d. higher than the British interest rate. e. lower than the British interest rate, but higher than the U.S. interest rate.

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Chapter 21: International Cash Management ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 19. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar.

Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been: a. negative. b. zero. c. positive, but less than the interest rate of their respective countries. d. more than the interest rate of their respective countries.

ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 20. According to ____, the effective yield earned by U.S. investors will be the same as the effective yield earned by nonU.S. investors in any given period. a. interest rate parity (IRP) b. the international Fisher effect (IFE) c. purchasing power parity (PPP) d. none of the above ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 21. Assume Scarlett Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 percent. At the time the loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha in one year is $.00056, the dollar amount initially invested in Zambia is $____, and $____ are paid out after one year. a. 1,500; 1,526 b. 1,526; 1,500 c. 1,500; 1,400 d. 1,400; 1,500 ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 22. Matis Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 percent. At the time the investment is made, the spot rate of the rand is $.205. If the spot rate of the rand at maturity of the investment is $.203, what is the effective yield of investing in rand? a. 11.08 percent b. 8.92 percent c. 10.00 percent d. none of the above ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 23. Assume that interest rate parity holds. The U.S. one-year interest rate is 10 percent, and the Australian one-year interest rate is 8 percent. What will the approximate effective yield of a one-year deposit denominated in U.S. dollars be for an Australian citizen? Assume the deposit is covered by a forward sale of dollars. a. 10 percent b. 8 percent c. 2 percent d. cannot answer without more information ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 24. Assume that you forecast the value of the euro as follows for the next year: Percentage Change Probability of Occurrence 2% 30% 3% 40% 5% 30% If the interest rate on the euro is 12 percent, the expected effective yield from a euro-denominated deposit is: a. 15.36 percent. b. 15.70 percent. c. 12.00 percent. d. 14.35 percent. e. none of the above ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50 percent of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8 percent. The Trinidad one-year interest rate is 10 percent, and the Japanese one-year interest rate is 7 percent.

Sciorra has determined the following possible percentage changes in the two individual currencies as follows: Currency Trinidad dollar Trinidad dollar

Percentage Change 1.0% 2.0%

Probability 35% 65%

Japanese yen Japanese yen

2.0% 1.0%

45% 55%

25. Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)? a. 6.47 percent b. 8.84 percent c. 8.50 percent d. none of the above ANSWER: b DIFFICULTY: Challenging LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 26. Refer to Exhibit 21-1 above. What is the probability that the yield of the two-currency portfolio is less than the domestic yield? a. .1575 b. .35 c. .6425 d. 1 e. none of the above ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 27. Which of the following is not a technique to optimize cash flows? a. Accelerate cash inflows b. Minimize currency conversion costs c. Manage blocked funds Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management d. All of the above are techniques to optimize cash flows ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 28. A ____ allows customers to send payments to a post office box. a. bilateral netting system b. multilateral netting system c. lockbox d. preauthorized payment ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 29. Lockboxes are post office box numbers assigned to employees for picking up their paychecks. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 30. Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to some limit. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 31. Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross-border transactions between subsidiaries. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 32. Leading refers to paying for supplies earlier than necessary; lagging refers to delaying the payment for supplies. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 33. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 34. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 35. A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic. a. True b. False ANSWER: a DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management LEARNING OBJECTIVES: INFM.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 36. To ____, MNCs can use preauthorized payments. a. accelerate cash inflows b. minimize currency conversion costs c. manage blocked funds d. manage intersubsidiary cash transfers ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 37. ____ may complicate cash flow optimization. a. The use of a zero-balance account b. Government restrictions c. Leading and lagging d. None of the above ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 38. MNCs typically consider all but the following ____ when investing cash over a short-term period a. large deposits at commercial banks b. Treasury bills c. commercial paper d. foreign stocks ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 39. Centralized cash management is more complicated when the MNC uses multiple currencies. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 40. In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Knowledge 41. Since each subsidiary may be more concerned with its own operations than with the overall operations of the MNC, a centralized management group may need to monitor the parent-subsidiary and intersubsidiary cash flows. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 42. If interest rate parity holds and the forward rate is expected to be an unbiased forecast of the future spot rate, then an uncovered investment in a foreign deposit will on average earn a similar effective yield as an investment in a domestic deposit. a. True b. False ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 43. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2 percent. If the Singapore dollar appreciates by less than 2 percent, the investment in Singapore will be more attractive. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: International Cash Management ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 44. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 45. The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency. a. inflation rate; exchange rate movements b. income level; interest rates c. interest rate; exchange rate movements d. interest rate; amount invested ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 46. An MNC that uses a strategy of dynamic hedging will apply a hedge it expects a foreign currency that it holds to appreciate, and it will remove the hedge when it expects the currency to depreciate. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 47. Which of the following statements is false? a. If interest rate parity exists, covered interest arbitrage is not worthwhile. b. If interest rate parity holds and the forward rate is an accurate forecast of the future spot rate, an uncovered investment in a foreign security is not worthwhile.

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Chapter 21: International Cash Management c. If interest rate parity exists and the forward rate is an unbiased forecast of the future spot rate, an uncovered investment in a foreign security will on average earn an effective yield similar to an investment in a domestic security. d. If interest rate parity exists and the forward rate is expected to underestimate the future spot rate, an uncovered investment in a foreign security is expected to earn a lower effective yield than an investment in a domestic security.

ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 48. If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage is feasible for investors residing in the ____ country. a. premium; home b. discount; home c. premium; foreign d. B and C ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Comprehension 49. Assume the U.S. one-year interest rate is 5 percent, while the South African one-year interest rate is 13 percent. If a U.S. firm invests in a South African one-year deposit, and the South African rand remains constant over the next year, the U.S. firm will earn an effective yield of: a. zero percent. b. 5 percent. c. 8 percent. d. 13 percent.

ANSWER: d LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application 50. The Mexican one-year interest rate is 9 percent, while the U.S. one-year interest rate is 3 percent. Assume that interest rate parity exists. If a U.S. uses the forward rate to forecast the exchange rate of the peso in one year, the expected effective yield from investing in a one-year deposit in Mexico is: a. 12 percent. b. 9 percent. c. 3 percent. d. 6 percent.

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Chapter 21: International Cash Management ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.05 KEYWORDS: Bloom's: Application

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