TEST BANK for Multinational Financial Management, 12th Edition by Alan C. Shapiro, Paul Hanouna, Atulya Test Bank For Sarin All12thChapters 1-18 Paul Hanouna, Multinational Financial Management, Edition Alan C. Shapiro, Atulya Sarin Chapter 1-18 CHAPTER 1 Introduction: Multinational Corporations and Financial Management EASY (definitional) 1.1 Which of the following is true regarding the strategic alliance? a) the partner firms can make cross-shareholding investments in each other b) allows partner firms the flexibility to retain their own organizational structure and corporate culture c) allows an easier way to exit d) all of the above Ans: d Section: Overseas Production Level: Easy 1.2 The primary objective of the multinational corporation is to a.) maximize shareholder wealth b) maximize world production c) minimize debt d) minimize the cost of doing business globally Ans: a Section: Multinational Financial Management: Theory and Practice Level: Easy 1.3 Traditionally, ____________ has been defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy. a) internationalization b) arbitrage c) financing d) total risk Ans: b Section: Relationship to Domestic Financial Management Level: Easy 1.4 The value of good financial management is ___________ in the global markets because of the much greater probability of market imperfections and multiple tax rates. a) minimized
b) neutralized c) enhanced d) arbitraged away Ans: c Section: The role of the financial executive in an efficient market Level: Easy 1.5 When a firm operates globally it offers advantages such as a) greater political power at home b) bless taxes on its profits c) greater negotiating power with foreign minority groups d) greater negotiating power with labor unions Ans: d Section: The rise of the Multinational corporation Level: Easy 1.6 The prime transmitter of global competitive forces is the a) public utility firm b) financial management experience of the U.S. markets c) the multinational corporation d) the Federal Reserve System of the U.S. Ans: c Section: The rise of the multinational Level: Easy 1.7 ___________ were the earliest multinationals. a) raw-material seekers b) market seekers c) cost minimizers d) oil companies Ans: a Section: Evolution of the multinational corporation Level: Easy 1.8 The ___________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets. a) cost minimizers b) market seekers c) raw-material seekers d) whaling companies Ans:
b
Section: Evolution of the multinational corporation Level: Easy 1.9 ___________ are a recent category of multinationals that seek out and invest in lower cost production sites overseas. a) Cost minimizers b) Market seekers c) Raw-material seekers d) High tech firms Ans: a Section: Cost minimizers Level: Easy 1.10 Which one of the following is a consequence of increased global competition? a) the creation of new steel plants in the old industrial countries b) the end of free-trade agreements between governments of the world c) increased comfort level of trade unions with the consequences d) increased anxiety among workers in the old industrial countries Ans: d Section: Consequences of Global Competition Level: Easy 1.11 International ________ can reduce the volatility of an investment portfolio because national financial markets tend to move independently of each other. a) arbitrage b) centralization of the MNC‟s cash c) diversification d) investment Ans: c Section: The Importance of Total Risk Level: Easy 1.12 Which one of the following has been a major driver of globalization? a) massive deregulation b) the collapse of the communist bloc c) revolution in information technologies d) all of the above Ans: d Section: The rise of the multinational corporation Level: Easy
1.13 Companies gradually increase their commitment to international business with strategies that are progressively more sophisticated. Which one of the following steps is NOT one of the steps? a) exporting b) setting up a sales subsidiary c) setting up a distribution system d) creating a legal entity in the new target country Ans: D Section: The Process of Overseas Expansion by Multinationals Level: Easy 1.14 Which one of the following is an alternate and/or a precursor to setting up a production facility abroad? a) exporting b) setting up a sales subsidiary c) setting up a distribution system d) licensing Ans: D Section: The Process of Overseas Expansion by Multinationals Level: Easy 1.15 In which category of multinational is McDonald‟s most likely to fall? a) raw materials seeker b) market seeker c) cost minimizer d) hedge fund Ans: b Section: Evolution of the multinational corporation Level: Medium 1.16 Opponents of free trade and globalization claim that competition by low and medium income countries for jobs and investment by multinational corporations_______. a) promotes higher environmental standards for a country is to raise its wealth b) helps developing countries to afford the cleaner environment their wealthier citizens will now demand c) unleashes the forces of creative destruction d) encourages a “race to the bottom” in environmental and labor standards Ans: d Section: Political and labor union concerns about global competition Level: Medium
1.17 The purchase of assets or commodities on one market for immediate resale on another in order to profit from a price discrepancy is known as______. a) currency exchange b) bargaining power c) capital asset pricing d) arbitrage Ans: d Section: Relationship to domestic financial management Level: Medium 1.18 Given the added risks associated with doing business abroad, companies should a) limit their foreign sales to less than 40% of total sales b) limit their foreign assets to less than 30% of total assets c) avoid foreign markets altogether unless they can earn a return in excess of the return they earn in their domestic market d) not limit their foreign sales at all Ans: d Section: The internationalization of business and finance Level: Medium 1.19 Which of the following is an example of reverse foreign investment? a) Honda builds a factory in Ohio b) Apple builds a plant in Ireland that exports to the United States c) British Telecom issues new stock in the United States d) American investors buy shares in Sony Ans: a Section: Market seeking Level: Medium 1.20 Which of the following is NOT a failing of the theory of comparative advantage? a) it ignores the role of uncertainty and economies of scale b) it assumes that factors of production are immobile c) it assumes that there are no differentiated products d) it assumes a scarcity of resources Ans: d Section: rise of the multinational Level: Medium 1.21 Although a firm may be interested in expanding overseas, it may not have the option to acquire a local operation. This type of challenge is most common in a) the European Union b) the United States
c) Japan d) developing countries Ans: d Section: The Process of Overseas Expansion by Multinationals Level: Medium 1.22 What would be the preferred mode of market penetration for the firm seeking to expand globally when the company wants to market its patent? a) Licensing b) Exporting c) Setting up local facilities d) Setting up a foreign sales office Ans: b Section: The Process of Overseas Expansion by Multinationals Level: Medium 1.23 Which of the following is generally a licensing rather than an exporting opportunity for a multinational looking to expand globally? a) The firm has a product that can be shipped without adaptation. b) The firm is seeking to market a specific product or process technology that can be written down and transmitted objectively. c) The firm has a product such as a new device that is technologically advanced. d) A firm that has a specialized cost-saving equipment. Ans: B Section: The Process of Overseas Expansion by Multinationals Level: Medium 1.24 Which of the following theories identifies specialization as the main reason for international business activity? a) product life cycle theory of international trade b) theory of diversification c) doctrine of comparative advantage d) theory of globalization Ans: c Section: Rise of the Multinational Level: Difficult 1.25 Which of the following is true regarding the advantages of exporting? a) a greater commitment to the local market b) ability to realize the full sales potential of a product c) capital requirements and start-up costs are high d) low risk
Ans: d Section: The Process of Overseas Expansion by Multinationals Level: Difficult 1.26 Multinational firms a) are riskier than purely domestic firms because of the exposures of operating abroad b) are less risky than purely domestic firms because of international diversification c) may be less risky than domestic firms if the added risks of operating overseas are more than offset by the ability to operate in nations whose economic cycles are not perfectly in phase d) invest in developed countries only and avoid developing economies Ans: c Section: The importance of total risk Level: Difficult 1.27 According to the capital asset pricing model a) only the systematic component of risk affects the required return b) foreign investments whose returns are uncorrelated with the market's return should have a higher required return than comparable domestic investments c) total risk of the investment is most relevant for small to medium-sized firms d) diversification is secondary to risk levels of the investment Ans: a Section: Capital asset pricing Level: Difficult 1.28 The internationalization process tends to a) proceed in a preprogrammed series of steps b) begin by licensing foreign producers c) inevitably involve foreign production d) often begin by accident Ans: d Section: Capital asset pricing Level: Difficult 1.29 According to the efficient market hypothesis, which one of the following is NOT correct? a) markets place a premium on the future b) today‟s stock price is the best predictor of tomorrow‟s stock price c) stock prices reflect all available information d) today‟s stock price incorporates the past history of prices Ans: a Section: Market efficiency
Level: Difficult 1.30 Which one of the following provides strong evidence that internationalization continues to grow in the world economy? a) import restrictions by the Bush Administration on foreign steel b) efforts suggested by politicians to restrict the sourcing of foreign products by locally headquartered multinationals c) the growing volume of foreign direct investment by U.S. as well as other multinational companies d) pressure on governments to embargo unfriendly nations Ans: c Section: Evolution of the Multinational Corporation Level: Difficult 1.31 For the multinational corporation, which one of the following complements to the integration of worldwide operations is MOST critical? a) flexibility b) adaptability c) speed d) economies of scale of distribution Ans: c Section: A Behavioral Definition of the Multinational Corporation Level: Difficult 1.32 Referring to the text, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that a) Avoids risk at any price b) Manages effectively the political environment of the subsidiary country c) Anticipates every future disturbance related to the supply chain d) Makes decisions that anticipates problems and provides solutions that enhances the firm‟s prospects for growth Ans: d Section: The Global Manager Level: Difficult 1.33 Reverse foreign investment into the United States primarily started with _________ multinationals? a) West European b) East European c) Japanese d) Chinese Ans:
d
Section: Market seeking Level: Difficult 1.34 Privatization refers to _____________ a) A corporation deciding to delist its shares on a stock exchange. b) A government that decides to purchase privately owned enterprises c) A government that decides to allow private enterprises to exist d) A government that decides to sell state owned enterprises to private investors. Ans. d Section The rise of the multinational corporation Level: Difficult 1.35 Total risk can be attributed to how many sources? a) 0 b) 1 c) 2 d) 3 Ans. c Section The Importance of Total Risk Level: Difficult 1.36 Which of the following factors has NOT recently contributed to radically changing the global competitive environment? a) Increased nationalizations of private enterprises b) Massive deregulation c) The collapse of the Soviet Union d) Advances in information technology Ans. a Section The Rise of the Multinational Corporation Level: Difficult 1.37 The world‟s dominant currency is the ______ a) Euro b) U.S. dollar c) British pound d) Swiss Franc Ans. b Section: Introduction Level: Easy. 1.38 The BRICS refer to which group of countries: a) Belgium, the Republic of Ireland, Croatia and Serbia b) Botswana, Rwanda, Ivory Coast, and Sudan
c) Brazil, Russia, India, China, and South Africa d) Big and Rich Industrial Countries of Southern Europe. Ans. c Section: Evolution of the Multinational Corporation Level: Easy 1.39 The theory of comparative advantage implies that: a) one country's gain comes at the expense of another country. b) international trade will enhance the standard of living of both countries. c) if a country doesn‟t have an absolute advantage in at least one good there is no benefit to trade d) that the country with cheaper labor will reap all the benefits from trade. Ans. b Section: The rise of the multinational corporation Level: Easy 1.40 The theory of comparative advantage ignores which of the following: a) Uncertainty b) Economies of scale c) Transportation costs d) All of the above Ans. d Section: The rise of the multinational corporation Level: Difficult
CHAPTER 2 The Determination of Exchange Rates
2.1 Under a currency board system, the central bank (if there is one) has ___discretion over monetary policy. a. no b. complete c. partial d. none of the above Ans: a Section: Central bank reputations and currency values Level: Easy 2.2 The high-quality currencies are those: a. that are expected to maintain their purchasing power b. that are issued by reputable central banks c. that are not expected to maintain their purchasing power d. both a and b Ans: d Section: Central bank reputations and currency values Level: Easy 2.3 Of the following, exchange rates depend the most upon relative a. monetary systems b. political systems c. trade deficits d. inflation rates between nations Ans: d Section: Factors that affect the equilibrium exchange rate-relative inflation rates Level: Easy 2.4 ______ is another name for the complete replacement of the local currency with the U.S. dollar. a. Seignorage b. Dollarization c. Depreciation d. Appreciation Ans: b Section: Currency Substitution/Dollarization Level: Easy
2.5 Central bank that lacks independence are forced to monetize the deficit, which means a. high nominal exchange rate b. lower inflation c. seigniorage d. financing the public sector deficit by buying government debt with newly created money Ans: d Section: Price Stability and Central Bank Independence Level: Easy 2.6 The asset market view of exchange rate determination does NOT state that the spot rate a. should follow a random walk b. is affected primarily by a nation's long-run economic prospects c. is influenced by a nation‟s annual economic growth d. should be strongly affected by a nation's balance of trade Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.7 When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention. a. unsterilized b. sterilized c. foreign market d. subsidized Ans: a Section: Sterilized versus unsterilized intervention Level: Easy 2.8 When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n). ________ operation. a. floating currency b. spot rate c. revaluation d. open market Ans: d Section: Sterilized versus unsterilized intervention Level: Easy
2.9 During the 1994 peso problem, Mexico made a fundamental error by not allowing the ________ of pesos to fall. a. demand b. supply c. devaluation d. real exchange rate Ans: b Section: Sterilized versus unsterilized intervention Level: Easy 2.10 When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign markets. a. competitive b. costly c. credit worthy d. productive Ans: a Section: How Real Exchange Rates Affect Relative Competitiveness Level: Easy 2.11 Although the mechanics of central bank interventions in the global currency markets may vary from country to country, the goal is always the same, to ____ the demand for one currency by ______ the supply of another. a. increase, increasing b. decrease, decreasing c. increase, decreasing d. decrease, increasing Ans: a Section: Foreign Exchange Market Intervention Level: Easy 2.12 On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM? a. 7.69% b. 8.33% c. 5.21% d. 9.27% Ans: a Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium
2.13 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a. 67% b. 40% c. 32% d. 28% Ans: a Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.14 The French euro devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the euro by a. 17% b. 16.31% c. 20.48% d. 17.54% Ans: c Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.15 If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by a. 33.32% b. 25.55% c. 10.11% d. 11.11% Ans: d Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.16 If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by a. 55% b. 100% c. 200% d. 1,000% Ans: b Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.17 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by
a. 60% b. 75% c. 125% d. 300% Ans: a Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.18 If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against the dinar by a. 45% b. 82% c. 55% d. 32% Ans: b Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.19 If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by a. 300% b. 200% c. 250% d. 400% Ans: d Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.20 If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the U.S. dollar a. 25% b. 20% c. 30% d. 10% Ans: b Section: Setting the equilibrium spot exchange rate - Calculating exchange rate changes Level: Medium 2.21 If a foreigner purchases a U.S. government security the a. supply of dollars rises b. federal government deficit declines c. demand for dollars rises
d. U.S. money supply rises Ans: c Section: Setting the equilibrium spot exchange rate Level: Medium 2.22 The foreign currency price of foreign goods in terms of the local currency price of domestic goods is called a. the real exchange rate b. the balance of trade c. the trade-weighted exchange rate d. purchasing parity Ans: a Section: How Real Exchange Rates Affect Relative Competitiveness Level: Medium 2.23 An increase in the real exchange rate will a. raise national income b. lower national income c. make a country less competitive in international trade d. lower the cost of foreign goods e. c and d Ans: e Section: How Real Exchange Rates Affect Relative Competitiveness Level: Medium 2.24 A slowdown in U.S. economic growth will a. boost the value of the dollar because inflation fears will be calmed b. boost the value of the dollar because the Federal Reserve will expand the money supply c. lower the value of the dollar because the U.S. will be a less attractive place to investors d. lower the value of the dollar because interest rates will rise Ans: c Section: Factors that Affect the Equilibrium Exchange Rate Level: Medium 2.25 The willingness of people to hold money a. increases with the interest rate b. rises with price stability c. rises with national income d. b and c only
Ans: d Section: The fundamentals of central bank intervention Level: Medium 2.26 Sound economic policies will a. raise the value of a nation's currency by boosting the economy b. lower the value of a nation's currency by increasing the precautionary demand for money c. lower the value of a nation's currency by leading to lower interest rates d. both b and c Ans: a Section: The fundamentals of central bank intervention Level: Medium 2.27 Large government budget deficits will a. raise the value of a nation's currency by raising domestic interest rates b. raise the value of a nation's currency by stimulating the domestic economy c. lower the value of a nation's currency by leading to higher inflation d. be irrelevant since historical experience shows no correlation between government budget deficits and the value of the nation's currency Ans: d Section: The nature of money and currency values Level: Medium 2.28 If you were a monetary authority and wanted to neutralize the effects of central bank currency interventions such as interest rate changes, which of the following would be most effective? a. the sale or purchase of Treasury securities b. the creation of a currency board c. pegging the exchange rate to another currency d. convincing investors that the currencies involved in the intervention are perfect complements to each other Ans: a Section: Sterilized versus Unsterilized Intervention Level: Medium 2.29 Which type of money is most likely to see its value fluctuate in the foreign exchange market? a. fiat money b. commodity money c. price-indexed money d. pegged-exchange rate
Ans: a Section: Central bank reputations and currency values Level: Difficult 2.30 An increase in the supply of U.S. dollars by the Federal Reserve will a. raise the value of the dollar because it will stimulate U.S. economic growth b. raise the value of the dollar because it will lead to higher U.S. interest rates c. reduce the value of the dollar because of inflation fears in the United States d. decrease the value of the dollar because it will force other countries to raise their interest rates Ans: c Section: The fundamentals of central bank intervention Level: Difficult 2.31 On July 19, 1985, the Italian lira devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the lira of a. 17% b. 16.31% c. 20.48% d. 17.54% Ans: c Section: Setting the equilibrium spot exchange rate Level: Difficult 2.32 Which of the following is an example of foreign exchange market intervention? a. the U.S. government pays Social Security checks to pensioners living in Poland b. IBM sells euros it received in international trade c. the Canadian government pays interest to Saudi Arabian investors d. the French government sells dollars in the foreign exchange market to prop up the value of the euro Ans: d Section: The fundamentals of central bank intervention Level: Difficult 2.33 During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen? a. 23.81% b. 31.25% c. 15.67% d. 40.78% Ans: b Section: Setting the equilibrium spot exchange rate Level: Difficult
2.34 The _______ for/of foreign currency in the U.S. is derived from the demand for ___________ by American consumers. a. Demand, foreign products b. Demand, tax loopholes c. Supply, lower tariffs d. Supply, local products Ans: a: Section: Setting the equilibrium spot exchange rate: Demand for a currency Level: Difficult 2.35 Which one of the following is NOT associated with dollarization of a nation‟s currency? a. In Panama 30-year mortgages were no longer available b. central banks may lose the profit on the currency they hold c. it has been known to provide price stability d. some capital may return and the economy begin to grow again Ans: a Section: Central Bank Reputations and Currency Values – Dollarization Level: Difficult 2.36 Which one of the following is NOT a disadvantage of a strong dollar? a. Ford Corporation‟s competitiveness diminishes in foreign markets b. American-made Dell computers lose sales to their Chinese counterparts c. U.S. unemployment levels rise in some sectors d. Americans will be less prone to buy foreign wines Ans: d Section: How Real Exchange Rates Affect Relative Competitiveness Level: Difficult 2.37 The value of the euro was $0.84 on October 27, 2000. On March 23, 2008 the same euro was worth $1.58. By how much did the value of the dollar depreciate vis-à-vis the euro? a. 88.10% b. -88.10% c. -67.13% d. -46.84% Ans: d Section: Setting the equilibrium spot exchange rate Level: Difficult
2.38. In the two years after Brexit the pound depreciated sharply by 17.81%. If the British pound two years after was worth $1.20, what was it worth before Brexit? a. $1.17 b. $1.46 c. $1.81 d. $1.92 Ans: b Section: Setting the equilibrium spot exchange rate Level: Difficult 2.39. On September 11, 2019, President Trump tweeted that the Federal Reserve should cut interest rates to zero or less. If financial markets view the Federal Reserve as being completely independent from the executive branch. Then what would be the likely market reaction on the value of the dollar relative to the euro. a. There should be no reaction based on that tweet b. The value of the dollar would drop c. The value of the euro would drop d. The value of the dollar would increase Ans: a Section: Central bank reputations and currency values Level: Medium 2.40 In response to a falling Turkish lira the President of Turkey Recep Tayyip Erdogan on May 11, 2018 called for lower interest rates and described interest rates as the “mother and father of all evil.” If markets believe the President of Turkey has influence on the central bank then what is the likely market reaction on that day? a. The Turkish lira will appreciate relative to the euro b. The Turkish lira will depreciate relative to the euro c. The dollar will appreciate relative to the euro and the Turkish lira d. There should be no market reaction based on this statement Ans: b Section: Central bank reputations and currency values Level: Medium
CHAPTER 3 The International Monetary System 3.1 The ________ is an exchange rate system that is free from central bank and other government-type interventions.
a) managed float b) clean float c) dirty float d) target-zone arrangement Ans: b Section: Free float Level: Easy 3.2 What is the name for the exchange rate system where market participants will adjust their current and expected future currency needs as price levels change, interest differentials appear, and economic growth occurs? a) free float b) clean float c) managed float d) dirty float Ans: a Section: Free Float Level: Easy 3.3 When governments attempt to reduce the uncertainty caused by short and medium term exchange rate changes, it is referred to as _________. a) smoothing out daily fluctuations b) leaning against the wind c) unofficial pegging d) a dirty float Ans: b Section: Managed float Level: Easy 3.4 Under a _________, countries adjust their national economic policies to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates. a) managed float b) „beggar-thy-neighbor” devaluation c) dirty float d) target-zone arrangement Ans: d Section: Target-zone arrangement Level: Easy
3.5 What is the name of the policy aimed to lessen the need to monetize a government‟s budget deficit by reducing expenditures often with the unintended outcome of increased unemployment? a) fixed-rate system b) managed float c) target-zone arrangement d) austerity Ans: d Section: Fixed-rate system Level: Easy 3.6 ________ is nonconvertible paper money backed only by faith in the monetary authorities. a) Specie b) Fiat money c) Seignorage d) Par value Ans:
b
Section: The classical gold standard
Level: Easy 3.7 Under the classic gold standard, if prices began rising in the U.S. a) the dollar value of the pound would rise b) the dollar value of the pound would fall c) the U.S. would begin running a balance of trade surplus d) gold would flow out of the U.S. and the U.S. money supply would drop Ans: d Section: The classical gold standard Level: Easy 3.8 The Bretton Woods system a) ended in 1971 b) ended in 1939 when World War II began c) is currently the basis for the international monetary system d) is currently in use only by the major industrial nations Ans: a Section: Introduction Level: Easy 3.9 The current exchange rate system can best be characterized as a ___ system. a) free float b) managed float c) fixed-rate
d) hybrid Ans: d Section: Alternative exchange rate systems Level: Easy 3.10 Managed floats do NOT fall into which of the following categories of central bank intervention? a) smoothing out daily fluctuations b) leaning against the wind c) unofficial pegging d) letting market forces set exchange rates Ans: d Section: Managed float Level: Easy 3.11 The European Monetary System is best described as a a) clean float b) target-zone arrangement c) dirty float d) managed float Ans: b Section: Lessons from the european monetary system Level: Easy 3.12 Which of the following produced a valuable lesson about exchange-rate stability and target-zone arrangements? a) European Monetary System b) European Community c) European Common Market d) European Union Ans: a Section: Lessons from the european monetary system Level: Easy 3.13 What is the name given to profits earned by a central bank from money creation? a) seigniorage b) interest arbitrage c) moral hazard d) fiat money Ans: a Section: European monetary union
Level: Easy 3.14 Policy makers have proposed the following steps for solving the currency crises: a) give new international agencies the power to guide global financial markets b) increase the International Monetary Fund‟s funding c) Both a and b d) Neither a nor b Ans: c Section: Emerging market currency crises Level: Easy 3.15 The Bretton Woods system fell apart because a) of the oil crisis b) U.S. monetary policy was too expansionary c) Japan ran a large trade surplus d) the United States no longer supported a pegged gold standard Ans: b Section: The bretton woods system: 1946-1971 Level: Easy 3.16 The gold standard was dissolved in 1973 because a) the U.S. printed too many dollars to maintain gold at $35/oz b) exchange markets preferred a floating rate system c) high interest rates raised the cost of holding gold d) some countries preferred to hold gold instead of dollars Ans: d Section: The post-bretton woods system Level: Easy 3.17 The rising dollar in the early 1980s can be attributed to a) high real interest rates in the United States b) improved investment prospects in the United States c) the growing U.S. budget deficit d) a and b only Ans: d: Section: The post-bretton woods system: 1971 to the present Level: Easy 3.18 The fall of the dollar beginning in 1985 can be attributed to a) the growing U.S. budget deficit b) the large U.S. trade deficit c) rapid U.S. economic growth
d) the slowdown in U.S. economic growth relative to growth overseas Ans: d Section: The post-bretton woods system: 1971 to the present Level: Easy
3.19 According to the Maastricht criteria, European nations must meet the following standard: a) the government budget deficit could exceed 3%of GDP b) the inflation rate could be more than 1.5% points above the average rate of Europe‟s three-lowest inflation nations c) government debt could not exceed 60%of GDP d) none of the above Ans: c Section: European monetary union Level: Medium 3.20 A gold standard ensures a long-run tendency toward price stability because a) gold is desirable b) gold is durable and storable c) the cost of producing an ounce of gold stays relatively constant overtime d) gold supply is directly related to consumer satisfaction Ans: c Section: A brief history of the International Monetary System Level: Medium 3.21 Calls for a new gold standard reflect a) fundamental distrust of government's willingness to maintain the integrity of fiat money b) a general willingness to accept fiat money c) a short memory of what actually transpired under the gold standard d) the durability and desirability of gold Ans: a Section: The classical gold standard Level: Medium 3.22 Assume you are a critic of the World Bank. Which one of the following would NOT be one of your criticisms? a) World Bank projects do not come under the scrutiny of the global financial markets. b) The Bank should move its lending operations out of China. c) The Bank is financing projects that encourage governments to enact changes that make countries more attractive to private investors. d) The Bank is funding projects to countries without giving them any incentive to change inefficient operations in the economy.
Ans: c Section: The gold exchange standard and its aftermath: 1925-1944 Level: Medium 3.23 Under the gold standard a) price levels rose dramatically b) price levels stayed constant over time c) the long-run stability of the price level includes alternating periods of inflation and deflation d) fiat money is more valuable Ans: c Section: The classical gold standard Level: Medium 3.24 A country that followed policies that would lead to a higher rate of inflation than that experienced by its trading partners would a) experience a balance-of-payments surplus as its goods became more expensive b) see a decrease in the supply of its currency on the foreign exchange markets c) find its currency subject to upward pressure d) experience a balance-of-payments deficit as its goods became more expensive Ans: d Section: The bretton woods system: 1946-1971 Level: Medium 3.25 Under a fixed-rate system, a country that followed policies leading to a lower inflation rate than that experienced by its trading partners would a) come under pressure to expand its money supply b) restrict the growth of its money supply c) experience a balance-of-payments deficit d) be forced to buy its currency in the foreign exchange market Ans: a Section: The bretton woods system: 1946-1971 Level: Medium 3.26 Under which one of the following would a country that followed policies leading to a lower inflation rate than that experienced by its trading partners would come under pressure to expand its money supply? a) fixed-rate currency system b) freely-floating currency system c) managed float d) currency board
Ans: a Section: The bretton woods system: 1946-1971 Level: Medium 3.27 Underlying the emerging markets currency crises, there is a fundamental conflict among policy objectives that the target nations have failed to resolve. Which one of the following is NOT in conflict? a) IMF bailouts
b) fixed exchange rates c) independent domestic monetary policy d) free capital movement Ans: a Section: Emerging market currency crises Level: Medium
3.28 In a fixed-rate system central banks would NOT maintain currency values by a) increasing the money supplies of nations with overvalued currencies b) boosting the money supplies of nations with undervalued currencies c) buying up overvalued currencies in the foreign exchange market d) selling undervalued currencies in the foreign exchange market Ans: a Section: Fixed-rate system
Level: Difficult 3.29 Governments intervene in the foreign exchange markets for all of the following EXCEPT to a) earn foreign exchange b) reduce economic uncertainty c) improve the nation's export competitiveness d) reduce inflation Ans: a Section: Managed float Level: Difficult 3.30 Under a fixed-rate system, which of the following four alternatives to devaluation is most likely to succeed? a) foreign borrowing b) austerity c) wage and price controls d) exchange controls Ans: b Section: Fixed-rate system Level: Difficult
3.31 In order to boost the value of the DM relative to the dollar a) the Fed should sell dollars for DM and the Bundesbank should buy DM with dollars b) the Fed should sell dollars for DM and the Bundesbank should buy dollars with DM c) the Fed should sell DM for dollars and the Bundesbank should sell dollars for DM d) the Fed should sell DM for dollars and the Bundesbank should buy DM with dollars Ans: a Section: Managed float Level: Difficult 3.32. In January 1948, France changed the French franc peg to 2.1439 FF for a US dollar, whereas the U.S. dollars was worth $35 for one ounce of gold. What would an ounce of gold be worth in French francs? a) 214.39 FF b) 75.04 FF c) 16.32 FF d) 35.00 FF Ans: b Section: The bretton woods system: 1946-1971 Level: Medium 3.33. What best characterizes the period of the classical gold standard (1821-1914). a) there were no exchange rates b) exchange rates were very volatile c) exchange rates were stable d) international trade was low Ans: c Section: How the classical gold standard worked in practice: 1821-1914 Level: Medium 3.34 The majority of countries abandoned the gold standard in 1914 when a) World War I started. b) The Great Depression started c) The United Kingdom and France lost their colonial empires. d) The Vietnam war escalated and the Great Society program started. Ans: a Section: The classical gold standard Level: Medium 3.35 Under the gold standard, changes in the price levels of one country are automatically corrected through the: a) Bretton Woods accord b) The target-zone arrangement
c) The price-specie-flow mechanism. d) The gold-flow-zone accords Ans: c Section: The classical gold standard Level: Medium 3.36 Under the Bretton Woods system each country established a par value for its currency in relation to the dollar. And the U.S. dollar was pegged to gold at a) $35 per ounce. b) $155 per ounce. c) $355 per ounce. d) $1550 per ounce. Ans: a Section: The bretton woods system: 1946-1971 Level: Medium 3.37 The G-7 is a group composed of which 7 countries: a) Canada, France, Japan, West Germany, Italy, the U.K., and the United States. b) France, Japan, Germany, Italy, Switzerland, the U.K., and the United States. c) China, France, Germany, Russia, Switzerland, the U.K., and the United States. d) China, Japan, Germany, Russia, South Korea, the U.K., and the United States. Ans: a Section: The Post Bretton Woods System: 1971 to the Present Level: Medium 3.38 With a floating exchange rate regime, countries maintain their monetary policy independence because the balance of capital flows will be achieved through a) exchange rate adjustments. b) the price-specie-flow mechanism. c) the specie-exchange-flow mechanism. d) the trilemma. Ans: a Section: The Trilemma and Exchange Rate Regime Choice Level: Medium 3.39 On January 1, 1999, the common European currency called the euro started when a) all EU countries adopted a common currency called the euro. b) eight of 15 EU countries adopted a common currency called the euro. c) nine of 15 EU countries adopted a common currency called the euro. d) eleven of 15 EU countries adopted a common currency called the euro. Ans: d
Section: European monetary union Level: Medium 3.40 Which country has negotiated an opt-out from the euro? a) Germany b) Malta c) Denmark d) Cyprus Ans: c Section: European monetary union Level: Medium CHAPTER 4 Parity Conditions in International Finance and Currency Forecasting 4.1 What is the name of the theory that states exchange-adjusted prices on identical tradeable goods and financial assets must be within transaction costs of equality globally? The Law of a) One Price b) Arbitrage c) Parity d) Capital Market Segmentation Ans: a Section: Arbitrage and the Law of One Price Level: Easy 4.2 In its absolute version, purchasing power parity states that price levels worldwide should be _______when expressed in a common currency.
a) equal b) roughly equal c) different d) opportunities for arbitrage Ans: a Section: Purchasing Power Parity Level: Easy 4.3 Which one of the following parity theories states that, in its absolute version, price levels globally should be equal when expressed in a common currency? a) purchasing power parity b) international Fisher effect c) interest rate parity d) the unbiased forward rate
Ans: a Section: Purchasing Power Parity Level: Easy 4.4 The theory of relative purchasing power parity states that, between two nations, the
a) inflation rates are unrelated b) exchange rate differential reflects the inflation rate differential c) inflation rate is smaller in weaker currencies d) the interest rate is greater than the inflation rate during depreciations Ans: b Section: Purchasing Power Parity Level: Easy
4.5 The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium. a) nominal exchange b) real exchange c) nominal interest d) adjusted dividend Ans: c Section: The Fisher Effect Level: Easy 4.6 A rise in one nation‟ inflation rate relative to those of other countries will be associated with a fall in the first nation‟s exchange rate and also with a rise of its interest rate relative to foreign interest rates. These two conditions combined will result in the _________ Effect. a) Fisher b) Herstatt c) Unbiased forward rate d) International Fisher Ans: d Section: The International Fisher Effect Level: Easy 4.7 Which one of the following approaches is the model-based approach to currency prediction? a) interest rates b) forward rates c) fundamental analysis d) none of the above Ans: c Section: Model-based forecasts Level: Easy
4.8 Which one of the following statements concerning exchange rate changes is correct? a) Changes in expected, as well as actual, inflation will cause exchange rate changes. b) Changes in expected, but not actual, inflation will cause exchange rate changes.
c) An increase in a currency‟s expected rate of inflation makes that currency less expensive to hold over time, all other things being equal. d) An increase in a currency‟s expected rate of inflation makes that currency more in demand at the same price, all other things being equal. Ans: a Section: Expected Inflation and Exchange Rate Changes Level: Easy 4.9 When real interest rates are determined by the global supply and demand for funds, we claim that it is an example of a) capital market integration b) capital market segmentation c) a real interest rate differential d) a nominal interest rate differential Ans: a Section: The Fisher Effect: Empirical Evidence Level: Easy
4.10 Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is a) $.00276 b) $.01190 c) $.00321 d) $.00102 Ans: d Section: Purchasing Power Parity Level: Medium 4.11 If the expected inflation rate is 5% and the real required return is 6%, then the Fisher effect says that the nominal interest rate should be a) 1% b) 11.3% c) 11% d) 6% Ans: b Section: The Fisher Effect Level: Medium 4.12 The inflation rates in the U.S. and France in January 1991 were expected to be 4% per annum and 7% per annum, respectively. If the current spot rate that day was $.1050, then the expected spot rate in three years was a) $.1150
b) $.1112 c) $.0964 d) $.0992 Ans: c Section: Purchasing Power Parity Level: Medium 4.13 Suppose the expected inflation in the U.S. on January 1, 1988 was projected at 5% annually for the next 5 years and at 12% annually in Italy for the same time period, and the lira/$ spot rate that day was currently at L2400 = $1, then the PPP estimate of the spot rate five years from now was a) 1738 b) 3314 c) 2560 d) 2250 Ans: b Section: Purchasing Power Parity Level: Medium 4.14 If expected inflation is 20% and the real required return is 10%, then the Fisher effect says that the nominal interest rate should be exactly a) 30% b) 32% c) 22% d) 12% Ans: b Section: The fisher effect Level: Medium 4.15 On January 1, 1990, the annual inflation rates in the U.S. and Greece were expected to be 3% and 8%, respectively. If the current spot rate that day for the drachma was $.007, then the expected spot rate in three years was a) $.00607 b) $.00823 c) $.00751 d) $.00694 Ans: a Section: Purchasing Power Parity Level: Medium 4.16 If a country's freely floating currency is undervalued in terms of purchasing power parity, its capital account is likely to be
a) in deficit or tending toward a deficit b) in surplus or tending toward a surplus c) subsidized by the International Monetary Fund d) a candidate for loans from the World Bank Ans: a Section: The Lesson of Purchasing Power Parity Level: Medium 4.17 If the rate of inflation in all of the world‟s currency markets rises from 5% to 7%, this will tend to make forward exchange rates move toward a) smaller premiums or larger discounts in relation to the dollar b) larger premiums or smaller discounts in relation to the dollar c) no change on average d) parity Ans: c Section: The Lesson of Purchasing Power Parity Level: Medium 4.18 A 150% real return in Brazil is higher than a 15% dollar return in the U.S. a) because arbitrage opportunities exist b) when the inflation controls are suspended in Brazil c) it depends on whether these are nominal or real returns d) regardless of nominal or real returns Ans: c Section: Purchasing Power Parity Level: Medium 4.19 On January 1, 1994, the annual inflation rates in the U.S. and Italy were expected to be 4% and 7%, respectively. If the current spot rate on that day was $1 = L2,000, then the expected spot rate for the lira in three years was a) $.0004591 b) $.0011590 c) $.0009892 d) $.0005471 Ans: a Section: Purchasing Power Parity Level: Medium 4.20 On January 1, 1985, the annual inflation rates in the U.S. and France were expected to be 4% and 6%, respectively. If the current spot rate that day was $.1250, then the expected spot rate in two years was a) $.1299
b) $.1150 c) $.1203 d) $.1335 Ans: c Section: Purchasing Power Parity Level: Medium 4.21 Suppose five-year deposit rates on Eurodollars and Euro marks are 12% and 8%, respectively. If the current spot rate for the mark is $0.50, then the spot rate for the mark five years from now implied by these interest rates is a) .5997 b) .4169 c) .5185 d) .4821 Ans: a Section: The international fisher effect Level: Medium 4.22 The direct spot quote for the Canadian dollar is $.76 and the 180-day forward rate is $.74. The difference between the two rates is likely to mean that a) inflation in the U.S. during the past year was lower than in Canada b) interest rates are rising faster in Canada than in the U.S. c) prices in Canada are expected to rise more rapidly than in the U.S. d) the Canadian dollar's spot rate is expected to rise in terms of the U.S. dollar Ans: c Section: Interest rate parity theory Level: Medium 4.23 Suppose that on January 1, 1987, the spot rate on the Dutch guilder was $0.39 and the 180-day forward rate was $0.40. The difference between the spot and forward rates suggested that a) interest rates were higher in the U.S. than in the Netherlands b) the guilder had risen in relation to the dollar c) the inflation rate in the Netherlands was declining d) the guilder was expected to fall in value relative to the dollar Ans: a Section: Interest rate parity theory Level: Medium 4.24 Suppose the price indexes in Mexico and the U.S., which both began the year at 100, are at 160 and 103, respectively, by the end of the year. If the exchange rate began
the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1, then the change in the real value of the peso during the year is (a minus indicates a real devaluation) a) 0.0% b) -5.0% c) 18.5% d) -8.2% Ans: c Section: Purchasing Power Parity Level: Medium 4.25 Suppose the spot rates for the pound, mark, and Swiss franc prior to 1999 were $1.20, $.32, and $.40, respectively. At the same time, the associated 90-day interest rates (annualized) were 16%, 8%, and 4%, while the U.S. 90-day interest rate was 12%. What was the 90-day forward rate (to the nearest cent) on a TCU (TCU 1 = £1 + DM1 + SFr1) if interest parity were to hold? a) $1.92 b) $1.98 c) $1.94 d) $1.87 Ans: a Section: Interest rate parity theory Level: Medium 4.26 The current five-year Euro yen rate is 6% per annum (compounded annually). The five-year Eurodollar rate is 8.5%. What is the implied forward premium or discount of the yen (over the current spot rate) for a five-year forward contract? a) 4.17% premium b) 18.46% discount c) 11.00% discount d) 12.36% premium Ans: d Section: Interest rate parity theory Level: Medium 4.27 Suppose the spot rates on Janurary 1, 1992 for the pound, mark, and Swiss franc were $1.50, $.42, and $.48, respectively. At the time, the associated 90-day interest rates (annualized) were 12%, 6%, and 4%, while the U.S. 90-day interest rate (annualized) was 8%. What was the 90-day forward rate on a DCU (DCU 1 = £1 + DM1 + SFr1) if interest parity were to hold? a) $2.4027 b) $2.3923 c) $2.4196 d) $2.3738
Ans: b Section: Interest rate parity theory Level: Medium 4.28 Suppose it is January 1, 1998 and spot pounds are selling at $1.7342, while 90-day forward pounds are selling at $1.7156. At the same time, DM spot and 90-day forward rates are $0.6138 and $0.6014, respectively. According to these quotes the a) pound is selling at a 3.87% forward discount relative to the DM b) pound is selling at a 2.37% forward premium relative to the DM c) DM is selling at a 0.97% forward discount relative to the pound d) DM is selling at a 1.54% forward premium relative to the pound Ans: a Section: Interest rate parity theory Level: Medium 4.29 If annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180-day forward rate will interest rate parity hold? a) $.1070 b) $.1150 c) $.1088 d) $.1130 Ans: c Section: Interest rate parity theory Level: Medium 4.30 If annualized interest rates in the U.S. and Switzerland are 10% and 4%, respectively, and the 90-day forward rate for the Swiss franc is $.3864, at what current spot rate will interest rate parity hold? a) $.3902 b) $.3874 c) $.3807 d) $.3792 Ans: c Section: Interest rate parity theory Level: Medium 4.31 The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34. The difference between the two rates means a) interest rates are higher in the U.S. than in Germany b) the euro has risen in relation to the dollar c) the inflation rate in Germany is declining
d) the euro is expected to fall in value relative to the dollar Ans: a Section: Interest rate parity theory Level: Medium 4.32 It is July 1, 1990. Suppose the spot rates for the pound, mark, and Swiss franc are $1.30, $.35, and $.40, respectively. The associated 90-day interest rates (annualized) are 16%, 8%, and 4%, while the U.S. 90-day interest rate (annualized) is 12%. What is the 90-day forward rate on an ACU (ACU 1 = £1 + DM1 + SFr1) if interest parity holds? a) $2.0512 b) $2.1134 c) $2.0397 d) $2.0489 Ans: d Section: Interest rate parity theory Level: Medium 4.33 The current five-year Euro yen and Eurodollar rates are 8% and 12.5% per annum, respectively. What is the implied forward premium or discount of the yen (over the current spot rate for a five-year forward contract)? a) 4.17% premium b) 18.46% discount c) 17.74% discount d) 22.64% premium Ans: d Section: Interest rate parity theory Level: Medium 4.34 The 90-day interest rates (annualized) in the U.S. and Japan are, respectively, 10% and 7%, while the direct spot quote for the yen in New York is $.004300. At what 90-day forward rate would interest rate parity hold? a) .004430 b) .004271 c) .004332 d) .004176 Ans: c Section: Interest rate parity theory Level: Medium 4.35 If annualized interest rates on January 1, 1985 in the U.S. and France were 9% and 13%, respectively, and the spot value of the franc was $.1109, then at what 180-day forward rate would interest rate parity hold?
a) $.1070 b) $.1150 c) $.1088 d) $.1130 Ans: c Section: Interest rate parity theory Level: Medium 4.36 Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the end of the year. Inflation during the year is 15% in England and 5% in the U.S. What is the real devaluation (-) or real revaluation (+) of the pound during the year? a) - 12.38% b) - 20.71% c) + 2.39% d) + 1.46% Ans: a Section: Purchasing Power Parity Level: Difficult 4.37 Suppose it is May 1, 1981 and the price indexes in Spain and the U.S., which both began the year at 100, are at 117 and 105, respectively, by the end of the year. If the beginning and ending exchange rates, respectively, for the peseta are $.1320 and $.1125, then the change in the real value of the peseta (a minus indicates a real devaluation) during the year is a) 0% b) -5.0% c) 2.4% d) -8.2% Ans: b Section: Purchasing Power Parity Level: Difficult 4.38 Suppose the Swiss franc revalues from $0.40 at the beginning of the year to $0.44 at the end of the year. U.S. inflation is 5% and Swiss inflation is 3% during the year. What is the real devaluation (-) or real revaluation (+) of the Swiss franc during the year? a) + 7.9% b) - 5.3% c) + 8.1% d) - 1.6% Ans: a Section: Purchasing Power Parity
Level: Difficult 4.39 Suppose the value of the Polish zloty moves from Z1000 = $1 at the start of the year to Z1,800 at the end of the year. At the same time, the Polish price level changes from an index of 100 on January 1 to 134 on December 31. U.S. inflation during the year was 4.5%. If the one-year interest rate on the zloty is 44%, what was the real dollar cost of borrowing the zloty during the year? a) 17.53% b) 27.81% c) -23.44% d) -8.76% Ans: c Section: Purchasing Power Parity Level: Difficult 4.40 Suppose it is October 1, 1990 and inflation rates in the U.S. and France are expected to be 4% and 9%, respectively, next year and 6% and 7%, respectively, in the following year. If the current spot rate is $.1050, then the expected spot value of the franc in two years is a) $.1111 b) $.1024 c) $.0992 d) $.1074 Ans: c Section: Purchasing Power Parity Level: Difficult 4.41 Suppose it is January 1, 1994 and the Deutsche mark revalues from $.30 at the beginning of the year to $.33 at the end of the year. Inflation during the year is 5% in the U.S. and 3% in Germany. What is the real devaluation (-) or real revaluation (+) of the Deutsche mark during the year? a) + 7.9% b) - 5.3% c) + 8.1% d) - 1.6% Ans: a Section: Purchasing Power Parity Level: Difficult 4.42 If the U.S. trade balance with Japan is expected to go from a deficit this year to a surplus next year, the forward rate on yen a) be less than the spot rate b) be higher than the spot rate
c) equal the spot rate d) could be either above or below the spot rate Ans: d Section: The relationship between the forward rate and the future spot rate Level: Difficult 4.43 The following exchange and interest rate quotations in 1998 were observed: Eurocurrency rates
Exchange rate per $
90-days (% annum) (Discretely-compounded)
90-day forward
Spot
$
DM
£
DM
£
DM
£
Bid:
15 5/8
7 7/8
12 1/4
1.881
.4961
1.801
.4937
Ask:
16
8 1/4
13
1.843
.4902
1.773
.4889
An arbitrage profit can be obtained by a) borrowing pounds and lending dollars b) borrowing dollars and lending DM c) borrowing DM and lending pounds d) there are no arbitrage opportunities Ans: a Section: Interest rate parity theory Level: Difficult 4.44 If the EURUSD exchange rate is $1.10/€ and interest rates are 2% in the U.S. and 1% in the eurozone, what is the 1-year forward rate? a) $1.11/€ b) $1.07/€ c) €1.03/$ d) $1.03/€ Ans: a Section: Interest rate parity theory Level: Difficult 4.45 If the 1-year interest rate is 2.25 percent in the United States; the EURUSD spot exchange rate is $1.10000/€; and the 1-year forward exchange rate is $1.12475/€. What must the 1-year interest rate be in the eurozone? a) -1% b) 0%
c) 1.5% d) 2.25% Ans: b Section: Interest rate parity theory Level: Difficult 4.46 If the 1-year interest rate is 2.25 percent in the United States and -0.25 percent in Sweden, and the one-year forward exchange rate is $0.10487/SEK. What must the SEKUSD spot exchange rate be? a) $0.10000/SEK b) $0.10487/SEK c) $0.102305/SEK d) $0.1105604/SEK Ans: c Section: Interest rate parity theory Level: Difficult CHAPTER 5 The Balance of Payments and International Economic Linkages 5.1 A balance of trade deficit results in a current account a) deficit b) surplus c) IMF intervention d) World Bank loan Ans: a Section: Current account Level: Easy 5.2 The account that records imports and exports of goods, services, income, and current unilateral transfers is known as the a) current account b) capital account c) financial account d) balance-of-payment account Ans: a Section: Balance-of-Payment categories Level: Easy
5.3 The change in private domestic borrowing or lending required to keep payments in balance without adjusting official reserves is called a) the net liquidity balance
b) the balance of payments c) the balance on current account d) the balance on capital account Ans: a Section: Balance-of-payments measures Level: Easy 5.4 Tourism shows up on the ____ account. a) merchandise b) current c) capital d) official reserves Ans: b Section: Current account Level: Easy 5.5 The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the a) balance of trade b) current account balance c) balance of payments d) capital account balance Ans: c Section: Balance-of-payments categories Level: Easy 5.6 What is another name for gifts and grants overseas? a) Unilateral transfers b) Basic balance c) Reserve assets d) Direct investment Ans: a Section: Balance-of-Payments categories Level: Easy 5.7 The sale of US treasury bonds by a Frenchman shows up as a) a credit on the capital account b) a debit on the trade account c) a credit on the official reserves account d) none of the above Ans:
d
Section: Balance-of-Payments categories Level: Easy 5.8 The sale of American computers to the Spanish government shows up as a) a debit on the official reserves account b) a credit on the official reserves account c) a credit on the trade account d) a debit on the current account Ans: c Section: Current account Level: Easy 5.9 Which of the following conditions be met for the US current-account deficit to disappear? a) if its rate of investment falls b) if the U.S. saving rate rises significantly c) both a and b need to occur together d) either a or b Ans: d Section: U.S. Deficits and the Demand for U.S. Assets Level: Easy 5.10 The US savings deficit can be attributed, in part, to a) the growing US budget deficit b) high real interest rates abroad c) low American investment in plant and equipment d) rising US taxes on capital accumulation Ans: a Section: The international flow of goods, services, and capital Level: Easy 5.11 What theory holds that a country‟s trade deficit worsens just after its currency depreciates because price effects will dominate the effect on volume of imports in the short run? a) J-curve theory b) Protectionism theory c) Official reserve transactions theory d) Net liquidity balance theory Ans: a Section: Coping with the Current-Account Deficit Level: Easy
5.12 Which one of the following would NOT be considered as part of a nation‟s capital account? a) license fees earned by Hewlett Packard b) purchases by the Chinese of U.S. real estate c) increases in Brazilian bank deposits in San Francisco banks d) purchases of U.S. Treasury bonds by the Bank of England Ans: a Section: Balance-of-Payment Categories Level: Medium 5.13 To which balance of payment category would purchases of gold by the Bank of England belong? a) Official Reserve Account b) Current Account c) Capital Account d) Unilateral transfers Ans: a Section: Balance-of-Payment categories Level: Medium 5.14 In a freely floating exchange rate system, if the current account surplus for the U.S. rises, what will most likely happen to the real value of the dollar? a) it will decline b) it will rise c) there is no impact on the dollar d) the IMF will step in to adjust rising exchange rates Ans: b Section: The link between the current and financial accounts Level: Medium 5.15 If a real value of a nation's freely floating currency increases, and the nation's current account is initially zero, its capital account will most likely be a) in deficit b) in surplus c) adjusted for the rate of inflation d) decreased by the amount of increase in the current account Ans: b Section: The link between the current and financial accounts Level: Medium 5.16 In a freely floating exchange rate system, the current account deficit leads to a) no impact
b) the rate of inflation is low c) high currency prices d) currency depreciation Ans: d Section: Currency depreciation Level: Medium 5.17 As the real value of the dollar rises, the balance on current account is likely to a) increase b) decrease c) stay the same d) move with the capital account adjustments factor Ans: b Section: Coping with The Current-Account Deficit Level: Medium 5.18 Which of the following accounts is the best measure of the change in private domestic borrowing or lending that is required to keep payments in balance without adjusting official reserves? a) net liquidity balance b) direct investment c) basic balance d) official reserve transactions balance Ans: a Section: Balance-of-Payments measures Level: Medium 5.19 In a freely-floating exchange rate system, the sale of Japanese cars to the United States will be offset by which item on the US balance of payments? a) a credit on the net liquidity balance b) a debit on the capital account c) a debit on the trade account d) a credit on the current account Ans: d Section: The link between the current and financial accounts Level: Medium 5.20 The Japanese current account surplus can best be attributed to a) the high rate of Japanese domestic investment b) Japanese protectionism c) the high rate of Japanese savings d) government budget deficits
Ans: c Section: The link between the current and financial accounts Level: Medium 5.21 The most likely way to reduce the Japanese trade surplus is to a) revalue the Japanese yen b) impose quotas on imports from Japan c) boost Japanese savings d) boost Japanese consumption Ans: d Section: The link between the current and financial accounts Level: Medium
5.22 Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a five-year loan from the US Export-Import Bank. There is a one year grace period on principal and interest payments. Which one of the following would NOT be one of the net impacts of this sale in 1991? a) a $150 million reduction in the U.S. trade deficit b) a $150 million reduction in the U.S. capital account surplus c) a $150 million increase in the U.S. trade deficit d) zero change in the U.S. balance of payments in 1991 Ans: c Section: The link between the current and financial accounts Level: Difficult 5.23 If a nation's income exceeds its spending, then which of the following would NOT result? a) savings will exceed domestic investment b) the nation must run a current-account surplus c) the nation must run a capital-account deficit d) savings will equal domestic investment Ans: d Section: Domestic saving and investment and the financial account Level: Difficult 5.24 A nation that is running a savings deficit a) must spend less than it produces b) will invest domestically more than it saves c) will invest domestically less than it saves d) must have a net capital outflow Ans: b Section: Domestic saving and investment and the financial account
Level: Difficult 5.25 In order to reduce its current-account deficit, the United States would NOT do which of the following? a) reduce the federal budget deficit b) raise national product relative to national spending c) increase savings relative to domestic investment d) decrease savings relative to domestic investment Ans: d Section: The link between the current and financial accounts Level: Difficult CHAPTER 6 The Foreign Exchange Market 6.1 ____________are deposits held by member banks at Federal Reserve branches. a) Fed funds b) Clearing House Interbank Payments c) SWIFT d) none of the above Ans: a Section: Fund transfers Level: Easy 6.2 Exports of goods and services by the United States by 2021 total more than _________ of gross domestic product. a) 10% b) 20% but no less than 50% c) 50% but no less than 75% d) 75% Ans: a Section: Introduction Level: Easy 6.3 Before the turn of this century, most currency transactions were channeled through the worldwide ________ market which used to account for _______ of foreign exchange transactions. a) stock, 50% b) interbank, 50% c) interbank, 95% d) internet, 30%
Ans: c Section: Organization of the foreign exchange market Level: Easy 6.4 The overwhelming majority of foreign exchange transactions involve a) multinational corporations buying and selling foreign exchange b) importers and exporters buying and selling foreign exchange c) banks buying and selling foreign exchange d) governments buying and selling foreign exchange Ans: c Section: The participants Level: Easy 6.5 The world's largest currency trading market is a) New York b) Frankfurt c) Tokyo d) London Ans: d Section: Market size Level: Easy 6.6 American terms refers to the a) numbers of U.S. dollars per unit of foreign currency b) number of foreign-currency units per U.S. dollar c) quotation system found in the United States d) bid-ask spread on the U.S. dollar Ans: a Section: Spot quotations Level: Easy
6.7 When exchange rates are quoted as the number of U.S. dollars per unit of foreign currency, it is referred to as a) American terms b) European terms c) fixed-exchange terms d) spot-market terms Ans: a Section: The Spot Market Level: Easy
6.8 When the home currency price of a certain fixed quantity of the foreign currency is quoted, it is referred to as the a) indirect quotation b) direct quotation c) European quotation d) American quotation Ans: b Section: Spot quotations Level: Easy 6.9 Trading on the foreign exchange market is
a) located in a physical headquarters in London b) takes place within an organized exchange c) conducted by licensed brokers from the London stock exchange d) an electronically linked network of banks, brokers, and dealers Ans: d Section: Organization of the Foreign Exchange Market Level: Easy 6.10 Traders on the foreign exchange market use ___________ to eliminate or cover the risk of loss on export or import orders denominated in foreign currencies.
a) currency options b) forward contracts c) money-market hedges d) currency futures contracts Ans: b Section: The participants Level: Easy 6.11 Hedgers, mostly _____________, engage in forward contracts on the foreign exchange markets to protect the home currency value of various foreign currencydenominated assets and liabilities on their balance sheets. a) commercial banks b) public utilities c) multinational corporations d) speculators Ans: c Section: The participants Level: Easy 6.12 What is the name of the foreign bank account that a trader maintains in a foreign bank and from which they would request transfer of currency to the account of another trader with whom they have concluded a transaction?
a) nostro account b) short sale account c) settlement account d) interbank account Ans: a Section: The Mechanics of Foreign Exchange Transaction Level: Easy 6.13 A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed exchange rate for a specified amount of one currency against another currency payment. a) spot quotation b) currency option c) currency swap d) forward contract Ans: d Section: The forward market Level: Easy 6.14 The risk that a central bank will not make the necessary transfer of foreign currency to complete a currency settlement is known as ________ risk. a) exchange rate b) Herstatt c) Interest-rate d) settlement Ans: b Section: The mechanics of Foreign Exchange Transaction Level: Easy 6.15 When an importer goes long in the forward market, they would be
a) buying currency for future delivery b) selling currency for future delivery c) arbitraging the interest rate differential d) buying a forward contract at a premium Ans: a Section: The Forward Market Level: Easy 6.16 The spot and 30-day forward rates for the euro are $1.4757 and $1.48, respectively. The euro is said to be selling at a forward a) premium of 1.2% b) premium of 3.5% c) discount of 3.5%
d) discount of 1.2% Ans: b Section: Forward quotations Level: Medium 6.17 Suppose the spot direct quotes for the pound sterling and euro are $1.3981-89 and $.1230-33, respectively. What is the direct quote for the pound in Paris? a) €1.1339-73/£ b) €.8793-.8819/£ c) £.0808-12/€ d) £.0976-87/€ Ans: a Section: Spot quotations Level: Medium 6.18 Suppose it is 1995 and the following direct quotes are received for spot and onemonth French francs in New York: .1160-684-6. Then the outright 30- day forward quote for the French franc was: a) .1156-62 b) .1164-74 c) .1166-72 d) .1154-64 Ans: b Section: Forward quotations Level: Medium 6.19 Suppose it is 1990 and the spot direct quotes for the Swedish krona and French franc are $.1395-99 and $.1130-33, respectively. What is the direct quote for the krona in Paris? a) 1.2312-81 b) 1.2435-37 c) .0806-11 d) .0973-81 Ans: a Section: Spot quotations Level: Medium 6.20 Suppose pound sterling is quoted at $1.4419-36, and the Swiss franc is quoted at $0.6250-67. What is the direct quote for the pound in Zurich? a) 2.3035-70 b) 2.3018- 88 c) 2.3008-98
d) 2.3020-50 Ans: c Section: Spot quotations Level: Medium 6.21 Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is quoted at $25.2513-3986. What is the direct quote for the Real in Bangkok? a) 27.1267-5673 b) 26.7801-9801 c) 25.2597-2700 d) 26.5524-8626 Ans: d Section: Spot quotations Level: Medium 6.22 If the direct price of the dollar is DM2.5 in 1990 Frankfurt and transaction costs were .4% of the amount transacted, then the minimum- maximum direct quotes for the DM in New York were: a) $.3968-4032 b) $2.4800-2.5200 c) $.3984-.4016 d) $2.4900-2.5100 Ans: a Section: Spot quotations Level: Medium 6.23 It is 1985 and suppose the 90-day forward quotes on the DM and the French franc are $.4002-10 and $.1180-90, respectively. What is the direct 90-day forward quote for the franc in Frankfurt? a) 3.3625-54 b) 3.3631-92 c) .2943-74 d) .2949-68 Ans: c Section: Forward quotations Level: Medium 6.24 The spot and 180-day forward rates for the euro are $1.3310 and $1.3402, respectively. The euro is said to be selling at a forward a) discount of 6.9% b) premium of 6.9% c) discount of 1.4%
d) premium of 1.4% Ans: d Section: Forward quotations Level: Medium 6.25 Suppose the spot direct quotes for the Italian euro and Swedish krone are $1.2509-51 and $.1201-10, respectively. What is the direct quote for the Swedish krone in Milan? a) €.00413-25/Kr b) €.00422-31/Kr c) €.0957-67/Kr d) Kr.0957-67/€ Ans: c Section: Forward quotations Level: Medium 6.26 Suppose the direct quote for sterling in New York is $1.3110-5. Then the direct quote for dollars in London is: a) .7110-5 b) 2.6220-30 c) .7625-8 d) 1.3110-5 Ans: c Section: Spot quotations Level: Medium 6.27 An American company that imports leather goods from England is most likely to be a) long pounds b) short pounds c) can't tell Ans: b Section: Spot quotations Level: Medium 6.28 On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the 180day forward Japanese yen was selling at a 1.91% annualized premium, what is the 180day forward rate of the yen? a) 0.008245 b) 0.008135 c) 0.008457 d) 0.010638
Ans: b Section: Forward quotations Level: Difficult 6.29 Suppose the spot rate and forward rate for the British pound are $1.4248 and $1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized discount, what is the number of days of the forward contract? a) 180 days b) 120 days c) 90 days d) 60 days Ans: c Section: Forward quotations Level: Difficult 6.30 Suppose one observed the following direct spot quotations in New York and London, respectively: $1.2500-60 and £.8000-50. Arbitrage profits per $1 million equal a) $637 b) $0 c) $1,268 d) $4,492 Ans: b Section: Currency arbitrage Level: Difficult 6.31 Suppose it is January 1980 and the $/DM exchange rate is DM1 = $.35 and the DM/FF exchange rate is FF1 = DM.31. What is the FF/$ exchange rate? a) 3.226 French francs per dollar b) 1.129 French francs per dollar c) .886 French francs per dollar d) 9.217 French francs per dollar Ans: d Section: Cross rates Level: Difficult 6.32 Suppose the following direct quotes are received for spot and one-month French francs in New York: .1260-684-6. Then the outright 30-day forward quote for the French is: a) .1256-62 b) .1264-74 c) .1266-72 d) .1254-64
Ans: b Section: Forward quotations Level: Difficult 6.33 If the direct price of the dollar is DKK5 in Copenhagen and transaction costs are .5%, then the minimum-maximum direct quotes for the Danish krone in New York are a) 4.9750-5.0250 b) 4.9500-5.0500 c) .1980-.2020 d) .1990-.2010 Ans: c Section: The spot quotations Level: Difficult 6.34 Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss franc is $0.71. Then the £/SFr cross rate is a) £1 = SFr 0.4383 b) SFr 1 = £2.2817 c) £1 = SFr 2.2817 d) SFr 1 = £1.2817 Ans: c Section: Cross rates Level: Difficult 6.35 Suppose the quote for euro is $.9865-92/€. The percentage spread is a) 2.31% b) 0.97% c) 0.62% d) 0.27% Ans: d Section: Transaction costs Level: Difficult 6.36 The largest currency trading pair is the a) Euro/US dollar b) Australian dollar/British pound c) US dollar/Japanese Yen d) US dollar/British pound Ans: a Section: Spot quotations Level: Difficult
6.37 The USD/GBP spot exchange rate is USD1.24/GBP and the CHF/USD is CHF0.99/USD. The GBP/CHF cross exchange rate is: a) 0.80 b) 0.81 c) 1.2300 d) 1.2500 Ans: b Section: Spot quotations Level: Difficult 6.38 The NZD/USD spot exchange rate is NZD1.59/USD and the AUD/USD is AUD1.48/USD. The NZD/AUD cross exchange rate is: a) 0.87 b) 0.93 c) 1.07 d) 1.15 Ans: c Section: Spot quotations Level: Difficult
CHAPTER 7 Currency Futures and Options Markets 7.1 What is the name of the market in the U.S. where trade takes place in currency futures? The a) United Currency Options Market b) Philadelphia Stock Exchange c) New York Futures Market d) Chicago Mercantile Exchange Ans: d Section: Futures contracts
Level: Easy 7.2 In the currency futures market, what is the term that describes the number of contracts in a currency outstanding at any one time? a) open interest b) closed interest c) long position d) in-the-money
Ans: a Section: Futures contracts
Level: Easy 7.3 Which of the following has provided a major inducement for speculators to participate in the futures market? a) low margin requirements b) low bid-ask spreads c) high volume compared to the forward market d) all of the above Ans: a Section: Forward contract versus futures contract Level: Easy 7.4 This shows how much money must be in the futures market account balance when the contract is first entered into. It is the a) initial performance bond b) performance bond call c) maintenance performance bond d) account balance Ans: a Section: Forward contract versus futures contract
Level: Easy 7.5 Options traded in the interbank market are known as a) listed options b) exchange-traded options c) over-the-counter options d) long-term options Ans: c Section: Market structure Level: Easy 7.6 Major advantages of futures contracts include the a) large number of currencies traded b) extensive delivery dates available c) freedom to liquidate the contract at any time before its maturity d) unlimited contract sizes Ans: c Section: Advantages and disadvantages of future contracts Level: Easy
7.7 The major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts a) cannot protect the holder against the risk of adverse movements in exchange rates b) are more expensive c) are available only for relatively short maturities d) eliminate the possibility of gaining a windfall profit from favorable movements in exchange rates Ans: d Section: Currency options Level: Easy 7.8 Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.3550 is said to be a) in-the-money b) out-of-the-money c) at-the-money d) past breakeven Ans: b Section: Currency options Level: Easy 7.9 Suppose the current spot rate for the pound is $01.7427. A put option with an exercise price of $01.7550 is said to be a) in-the-money b) out-of-the-money c) at-the-money d) past breakeven Ans: a Section: Currency options Level: Easy 7.10 What is the name for the value of the option that is the amount by which the option is in-the-money? a) intrinsic value b) economic value c) market price d) the currency spread Ans: a Section: Option Pricing and Valuation
Level: Easy 7.11 Which one of the following is credited with an important role on the Chicago Mercantile Exchange because, in the process of realizing profit opportunities, they keep futures rates in line with bank forward rates?
a) speculators b) hedgers c) arbitrageurs d) currency traders Ans: c Section: Arbitrage Between the Futures and Forward Markets
Level: Medium 7.12 The basic difference(s) between forward and futures contracts is that a) forward contracts are individually tailored while futures contracts are standardized b) forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange c) forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations d) all of the above Ans: d Section: Forward contract versus futures contract Level: Medium 7.13 Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is a) $0 b) $630 c) $740 d) $2,340 Ans: b Section: Option pricing and valuation Level: Medium 7.14 The time value of a European option a) is always positive for an out-of-the-money option b) is always positive for an in-the-money option c) is always positive for an at-the-money option d) decreases with the time that remains until the option expires Ans: a Section: Option pricing and valuation Level: Medium 7.15 You can speculate on a pound depreciation by a) selling pound futures and buying a pound call option b) buying pound futures and a pound put option c) selling pound futures and a pound put option d) none of the above
Ans: d Section: Using forward or futures contracts versus options contracts Level: Medium 7.16 Suppose you are holding a long position in a euro futures contract that matures in 76 days. The agreed-upon price is $1.15 for 125,000 euro. At the close of trading today, the futures price has risen to $1.155. Under marking to market, you now a) hold a futures contract that has risen in value by $1,250 b) hold a futures contract that has fallen in value by $625 c) will receive $625 and a new futures contract priced at $1.155 d) must pay over $1,250 to the seller of the futures contract Ans: c Section: Forward contract versus futures contract Level: Difficult 7.17 Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795. How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000? a) $400 b) $68 c) $215 d) $58 Ans: a Section: Arbitrage between the futures and forward markets Level: Difficult 7.18 Suppose it is May 1998 and the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time value of one DM 62,500 call option? a) $2,331.25 b) $1,562.50 c) $950.00 d) $768.75 Ans: d Section: Option pricing and valuation Level: Difficult 7.19 Suppose it is January 1990 and the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the intrinsic value of one DM 62,500 call option? a) $2,331.25
b) $1,562.50 c) $950.00 d) $768.75 Ans: b Section: option pricing and valuation Level: Difficult 7.20 The value of a European option always a) exceeds its intrinsic value b) rises with the time to maturity c) rises with the interest rate d) rises with the volatility of the exchange rate Ans: d Section: Option pricing and valuation Level: Difficult 7.21 A rise in the domestic interest rate will a) raise the value of foreign-currency call options and reduce the value of foreign-currency put options b) raise the value of foreign-currency put options and reduce the value of foreign-currency call options c) raise the value of both foreign-currency put and call options d) reduce the value of both foreign-currency put and call options Ans: a Section: Option pricing and valuation Level: Difficult 7.22 A rise in the foreign interest rate will a) raise the value of foreign-currency call options and lower the value of foreign-currency put options b) raise the value of foreign-currency put options and lower the value of foreign-currency call options c) raise the value of both foreign-currency put and call options d) reduce the value of both foreign-currency put and call options Ans: b Section: Option pricing and valuation Level: Difficult 7.23 You can speculate on an appreciation of the Japanese yen by a) selling a yen put option and buying a yen call option b) selling a yen put option and selling a yen call option c) buying a yen put option and selling a yen call option
d) buying a yen put option and buying a yen call option Ans: a: Section: Option pricing and valuation Level: Difficult 7.24 Fluor Corporation has just made a French euro bid on a major project located in France. It won't find out for 60 days whether it has won the contract. There will be a 10% signing bonus payable to the winner in euros. The best way to protect against currency risk on its bid is for Fluor to a) buy a euro futures contract b) sell a euro call option c) sell a euro futures contract d) buy a euro put option Ans: d Section: Using forward or futures contracts versus options contracts Level: Difficult CHAPTER 8 Currency, Interest rate, and Credit Derivatives and Swaps 8.1 An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount. a) interest rate b) currency c) bond d) currency bond Ans: a Section: Interest rate swaps Level: Easy 8.2 In a __________ swaps, two parties exchange floating interest payments based on different reference rates. a) basis b) coupon c) notional d) forward rate Ans: a Section: Interest rate swaps Level: Easy 8.3 The theoretical principal underlying the swap is termed the a) basis amount b) swap differential c) notional principal
d) arbitrage principal Ans: c Section: Interest rate swaps Level: Easy 8.4 In the swap market, the reference amount against which the interest is calculated is known as the a) notional principal b) basis amount c) arbitrage principal d) swap differential Ans: a Section: Interest rate swaps Level: Easy 8.5 In a _____ swap, one party pays a fixed rate calculated at the time off trade as a spread to a particular Treasury bond, and the other sides pays a floating rate. a) currency b) interest rate c) coupon d) basis Ans: c Section: Interest rate swaps Level: Easy 8.6 The exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency is known as a) a currency swap b) an interest rate swap c) a floating-rate bond d) a fixed-rate bond Ans: a Section: Currency swaps Level: Easy 8.7 In a currency swap, the effective interest rate on the money raised is known as the a) notional principal b) all-in cost c) right of offset d) yield to call
Ans: b Section: Currency swaps Level: Easy 8.8 Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully. a) hedging b) factoring c) arbitrage d) forfaiting Ans: c Section: Economic advantages of swaps Level: Easy 8.9 A(n) ________ is a cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount. a) interest rate currency swap b) dual currency bond c) exchange of principal d) forward rate agreement Ans: d Section: Forward rate agreement Level: Easy 8.10 The average interest rate offered by a specific group of multinational banks in London was known as the a) LIBOR rate b) prime rate c) fed funds rate d) Eurobond rate Ans: a Section: Reference rates Level: Easy 8.11 After 2022, new bond and loan issues have largely switched from ______to ______. a) LIBOR, RFR b) RFR, LIBOR c) LIBOR, forward rate agreement d) forward rate agreement, LIBOR Ans: a Section: Reference rates
Level: Easy 8.12 A(n) __________ is a contract that fixes an interest rate today on a future loan or deposit a) inverse floater b) step-up c) step-down d) forward forward Ans: d Section: Forward forwards Level: Easy 8.13 A _________ future is a cash-settled futures contract for a three-month $1,000,000 eurodollar deposit that pays LIBOR. a) forward b) eurodollar c) forward rate agreement d) currency swap Ans: b Section: SOFR/Eurodollar futures Level: Easy 8.14 What is the name of the debt instruments with a high coupon in earlier payment periods and a lower coupon in later payment periods? a) step-down coupon notes b) callable step-up notes c) inverse floaters d) structured notes Ans: a Section: Structured Notes: Step-down coupon note Level: Easy MEDIUM (applied) 8.15 Swaps are primarily of value because they permit firms to a) tap new capital markets b) reduce risks c) reduce taxes d) a and b only Ans: d Section: Interest rate and currency swaps Level: Medium
8.16 A currency swap is equivalent to a a) currency option, with the exercise price equal to the current spot rate b) long-dated forward foreign exchange contract, where the forward rate is the current spot rate. c) interest rate swap, where the basis is the differential between the fixed and floating interest rates d) short-term currency futures contract Ans: b Section: Currency swaps Level: Medium 8.17 What is the name of the callable debt issues that feature one or more increases in a fixed rate or a step-up in a spread over SOFR during the life of the note? a) step-down coupon notes b) callable step-up notes c) inverse floaters d) structured notes Ans: b Section: Callable step-up note Level: Medium 8.18 _________offers protection on a basket of securities a) single-name CDS b) upfront premium c) CDS indexes d) Big Bang Ans: c Section: CDS indexes Level: Medium 8.19 If the world capital market were fully integrated, the incentive to swap would be ____ because ____ arbitrage opportunities would exist. a) increased; more b) reduced; fewer c) increased; fewer d) reduced; more Ans:b Section: Economic advantages of swaps Level: Medium
The following statement is to be used in answering questions 20 and 21. Company X, a low-rated firm, desires a fixed-rate, long-term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed-rate bond market. In contrast, company Y, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 9% and floating-rate funds at LIBOR + 1/4%. Suppose they split the cost savings. 8.20 How much would X pay for its fixed-rate funds? a) 9.5% b) 10.0% c) 10.5% d) 10.75% Ans: c Section: Interest rate and currency swaps Level: Difficult 8.21 How much would Y pay for its floating-rate funds? a) LIBOR -.25% b) LIBOR -.50% c) LIBOR d) LIBOR + .5% Ans: a Section: Interest rate and currency swaps Level: Difficult The following statement is to be used in answering questions 22-24. Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed-rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%. 8.22 What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel? a) 1% b) 75% c) 2% d) 1.25% Ans: c Section: Interest rate and currency swaps Level: Difficult
8.23 What is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil? a) 1% b) 75% c) 2% d) 1.25% Ans: c Section: Interest rate and currency swaps Level: Difficult 8.24 Suppose a bank charges .8% to arrange the swap and Axil and Bevel split the resulting cost savings. Then Axil will pay --- for its floating-rate money and Bevel will pay ---- for its fixed-rate money. a) LIBOR - .7%; 7.5% b) LIBOR + .4%; 7.15% c) LIBOR; 7.45% d) LIBOR + .5%; 6.75% Ans: b Section: Interest rate and currency swaps Level: Difficult 8.25 The economic benefits associated with swaps may derive from all of the following EXCEPT a) legal restrictions on spot and forward foreign exchange transactions b) different perceptions by investors of risk and creditworthiness of the two parties to the swap c) appeal or acceptability of one borrower to a certain class of investor d) in nations with fixed or pegged exchange rates Ans: d Section: Economic advantages of swaps Level: Difficult 8.26 Suppose a U.S. corporation wants to secure fixed-rate funds in pounds in order to reduce its pound exposure, but is hampered in doing so because it is a relatively unknown credit in the British financial market. In contrast, a British company that is well established in its own country may desire floating-rate dollar financing, but is relatively unknown in the U.S. financial market. What is the most appropriate form of swap for these two parties? a) interest rate/currency swap b) currency swap c) interest rate swap d) debt/equity swap
Ans: a Section: Interest rate and currency swaps Level: Difficult 8.27 Suppose a hedge fund would like to protect itself against the event of a bankruptcy by a U.S. corporation. What position should it take? a) Buy a Credit Default Swap b) Sell a Credit Default Swap c) Buy a Protective Swap d) Sell a Protective Swap Ans: a Section: Credit default swaps Level: Difficult 8.28 Suppose a hedge fund would like to protect $10,000,000 of bonds on XYZ corporation against the event that the corporation goes bankrupt. Credit Default Swaps are available on XYZ but currently cost 200 bps. What quarterly premium will the hedge fund need to pay the seller of protection? a) $2,500,000 b) $200,000 c) $100,000 d) $50,000 Ans: d Section: Credit default swaps Level: Difficult 8.29 Suppose the CDS on Ecuador is trading at 250 bps and the CDS on Bolivia is trading at 300 bps. What can be inferred from this information? a) Bolivia is more likely to default on its debt than Ecuador b) Ecuador is more likely to default on its debt than Bolivia c) Bonds in Ecuador are likely to increase in value by 250 bps. d) Bonds in Bolivia are likely to increase in value by 300 bps. Ans: a Section: Credit default swaps Level: Difficult 8.30 Suppose that Ecuador elects a politician whose electoral platform is the repudiation of international debt. What will be the likely market reaction? Spreads on Credit Default Swaps will increase. a) Spreads on Credit Default Swaps will decrease. b) Government of Ecuador bonds will increase in price due to greater demand from the buyback program.
c) None of the above. Ans: a Section: Credit default swaps Level: Difficult CHAPTER 9 Measuring and Managing Translation and Transaction Exposure 9.1___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge. a) arbitraging b) cross-hedging c) hedging d) risk shifting Ans: c Section: Introduction Level: Easy 9.2 Hedging cannot provide protection against ________ exchange rate changes. a) expected b) nominal c) real d) pegged Ans: a Section: Designing a hedging strategy, Summary and conclusions Level: Easy 9.3 The basic hedging strategy involves a) reducing hard currency assets and soft currency liabilities b) increasing hard currency liabilities and soft currency assets c) reducing soft currency assets and hard currency liabilities d) converting soft currencies to hard currencies and lending hard currencies Ans: c Section: Managing translation exposure Level: Easy 9.4 Translation exposure reflects the exposure of a company's a) foreign operations to currency movements b) foreign sales to currency movements c) financial statements to currency movements d) cash flows to currency movements
Ans: c Section: Alternative measures of foreign exchange exposure Level: Easy 9.5 The type of exposure that arises from the need, for purposes of reporting and consolidating, to convert the financial statements of foreign operations from the local currencies involved to the home currency is known as a) translation exposure b) accounting exposure c) transaction exposure d) both a and b Ans: d Section: Alternative measures of foreign exchange exposure Level: Easy 9.6 The type of exposure that measures the extent to which currency fluctuations can alter a company‟s future operating cash flows, that is, its future revenues and costs is known as a) translation exposure b) accounting exposure c) transaction exposure d) operating exposure Ans: d Section: Alternative measures of foreign exchange exposure Level: Easy 9.7 The current standard for measuring translation exposure is a) the current/noncurrent method b) the monetary/nonmonetary method c) FASB 8 d) FASB 52 Ans: d Section: Alternative measures of foreign exchange exposure Level: Easy 9.8 Under FASB 52, most financial statements must be translated using the a) monetary/nonmonetary method b) current/noncurrent method c) current rate method d) temporal method Ans:
c
Section: Current Rate Method Level: Easy 9.9 Firms that attempt to reduce risk and beat the market simultaneously may end up with
a) more risk, not less b) less risk c) a profit as well as reduced risk d) a loss as well as reduced risk Ans: a Section: Designing a hedging strategy: objectives Level: Easy 9.10 One argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________. a) risk shifting b) risk sharing c) offshore banking d) exposure netting Ans: d Section: Costs and Benefits of Standard Hedging Techniques Level: Easy 9.11 The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use a) centralization of its hedging activities b) segmentation of its hedging activities to the firm‟s foreign subsidiaries c) decentralization of its hedging activities d) foreign banks and the purchase of forward contracts. Ans: a Section: Centralization versus decentralization Level: Easy 9.12 In a forward market hedge, a company that is long a foreign currency will ____ the foreign currency forward. a) buy b) sell c) borrow d) lend Ans: b Section: Forward market hedge Level: Easy
9.13 A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency‟s value of a future foreign currency cash flow. a) forward contract b) currency collar c) money-market hedge d) currency option Ans: c Section: Money market hedge Level: Easy 9.14 A __________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.
a) forward contract b) exposure netting c) money-market hedge d) currency option Ans: b Section: Exposure netting Level: Easy 9.15 The FASB document that aims to establish accounting and reporting standards for derivative instruments and for hedging activities is FASB a) 8 b) 52 c) 100 d) 133 Ans: d Section: Accounting for Hedging and FASB 133 Level: Easy 9.16 Which one of the following is most likely to depreciate? a) hard currency b) soft currency c) currency with a high national growth rate d) currency with expected interest rates expected to decrease Ans: b Section: Managing Translation Exposure Level: Easy 9.17 The major difference between monetary/nonmonetary method is that
the
temporal
method
and
the
a) under the monetary/nonmonetary method, long-term debt is translated at the historical rate, whereas under the temporal method, long-term debt is translated at the current rate b) under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values c) under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate d) under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate Ans: b Section: Alternative currency translation methods Level: Medium 9.18 ____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency. a) translation b) transaction c) operating d) accounting Ans: b Section: Transaction exposure Level: Medium 9.19 It is possible for transaction exposure to be positive and translation exposure in the same currency to be a) always positive b) exactly offsetting c) negative d) synonymous Ans: c Section: Transaction exposure Level: Medium 9.20 Which one of the following would NOT be a suggested element for an effective exposure management strategy? a) determine the types of exposure to be monitored b) formulate corporate objectives c) ensure that the corporate objectives a consistent with maximizing shareholder value d) avoid the use of forward contracts where possible
Ans: d Section: Designing a hedging strategy Level: Medium The following information is to be used in answering questions 21-22. In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet: Cash, marketable securities Accounts receivable Inventory (at market. Fixed Assets
DM 250,000 1,000,000 2,700,000 5,100,000 ----------------DM 9,050,000
Current liabilities Long-term debt Equity
DM 750,000 3,400,000 4,900,000
Total liabilities plus equity
--------------DM 9,050,000
Total assets Suppose the DM appreciates from $0.70 to $0.76 during the period. 9.21 Under the current/noncurrent method, what is Ajax's translation gain (loss).? a) a gain of $294,000 b) a gain of $192,000 c) a loss of $174,000 d) a loss of $12,000 Ans: b Section: Current/non current method Level: Medium 9.22 Under the temporal method, what is Ajax's translation gain (loss).? a) a gain of $294,000 b) a gain of $192,000 c) a loss of $174,000 d) a loss of $12,000 Ans: d Section: Temporal method Level: Medium 9.23 Under the current rate method, what is Ajax's translation gain (loss).? a) a gain of $294,000 b) a gain of $192,000 c) a loss of $174,000 d) a loss of $12,000 Ans: a Section: Current rate method Level: Medium
9.24 Under the monetary/non-monetary method, what is Ajax's translation gain (loss)? a) a gain of $294,000 b) a gain of $192,000 c) a loss of $174,000 d) a loss of $12,000 Ans: c Section: Monetary/nonmonetary method Level: Medium 9.25 Which of the following is a basic hedging technique during a depreciation? a) buy local currency forward b) sell a local currency put option c) reduce levels of local currency cash and marketable securities d) loosen credit (increase local currency receivables) Ans: c Section: Costs and benefits of standard hedging techniques Level: Medium 9.26 Dell Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using a money market hedge? a) borrow £1 million pounds today b) lend £1 million pounds today c) borrow £869,565 pounds today d) lend £986,754 pounds today Ans: c Section: Costs and benefits of standard hedging techniques Level: Medium 9.27 Suppose markets are efficient, there are no taxes, and relative prices remain constant. In such a world, a) hedging can not still be of value b) exchange risk management remains of vital concern c) markets are always free of inflation d) exchange risk is nonexistent Ans: b Section: Managing risk management Level: Medium
9.28 American Airlines hedges a £2.5 million receivable by selling pounds forward. If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158, what is American's cost of hedging? a) $142,000 b) $35,500 c) $8,875 d) it is unknown at the time American enters into its hedge Ans: d Section: The true cost of hedging Level: Medium 9.29 Suppose it is 1987 and General Motors uses a money market hedge to protect an Lit 200 million payable due in one year. The U.S. interest rate at the time of the hedge was 9% and the lira interest rate was 14%. If the spot rate moved from Lit 1293 at the start of the year to Lit 1349 at the end of the year, what was GM's cost of the money market hedge? a) $3,647 b) $414 c) GM gained $1,069 d) GM gained $5,631 Ans: b Section: Money market hedge Level: Medium 9.30Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the 90-day forward rate is ¥149/$1. If the spot rate in 90 days is ¥154/$, how much has this forward market hedge cost PepsiCo?
a) $173,160 b) $44,743 c) Pepsi gains $173,160 from the forward contract d) Pepsi gains $217,903 from the forward contract Ans: d Section: Money market hedge Level: Medium
9.31 Suppose the English subsidiary of a U.S. firm had current assets of £1 million, fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year. There are no long-term liabilities. If the pound depreciated during
that year from $1.50 to $1.30, the translation gain (loss) to be included in the parent company's equity account according to FASB #52 is a) 0 since the current assets and current liabilities cancel b) +$200,000 c) -$250,000 d) -$400,000 Ans: d Section: Appendix: Statement of FASB No. 52 Level: Difficult 9.32 Suppose the German subsidiary of a U.S. firm had current assets of €3 million, fixed assets of €6 million and current liabilities of €3 million both at the start and at the end of the year. There are no long-term liabilities. If the euro depreciated during that year from $.48 to $.38, the FASB-52 translation gain (loss. to be included in the parent company's equity account is a) 0, since the current assets and current liabilities cancel b) +$300,000 c) -$350,000 d) -$600,000 Ans: d Section: Appendix: Statement of FASB No. 52 Level: Difficult 9.33 Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement unless the gains or losses are attributable to a) foreign currency transactions that are designated as an economic hedge of a net investment in a foreign entity b) intercompany foreign-currency transactions that are of a short- term nature c) foreign-currency transactions that involve currency speculation d) the prospect of government intervention using currency controls Ans: a Section: Appendix: Statement of FASB No. 52 Level: Difficult 9.34 If you fear the dollar will rise against the Spanish peseta, with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary, you can hedge by a) selling pesetas forward in the amount of net assets b) buying pesetas forward in the amount of net assets c) reducing the liabilities of the subsidiary d) selling pesetas forward in the amount of total assets
Ans: a Section: Forward market hedge Level: Difficult 9.35 On March 1, 1998, Bechtel submits a franc-denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract? a) sell the franc amount of the bid forward for U.S. dollars b) buy French francs forward in the amount of the contract c) buy a put option on francs in the amount of the franc exposure d) sell a call option on francs in the amount of franc exposure Ans: c Section: Foreign currency options Level: Difficult 9.36 A Japanese firm sells LED TV sets to an American importer for one billion yen payable in 90 days. To protect against exchange risk, the importer could a) borrow yen, convert to dollars, and lend dollars for the interim period b) sell yen on the forward market c) sell a call option on yen d) buy a futures contract for yen on the IMM Ans: d Section: Cross-hedging Level: Difficult 9.37 If you fear the dollar will rise against the euro, with a resulting adverse change in the dollar value of the equity of your French subsidiary, you can hedge by a) selling euros forward in the amount of net assets b) buying euros forward in the amount of net assets c) reducing the liabilities of the subsidiary d) selling euros forward in the amount of total assets Ans: a Section: Forward market hedge Level: Difficult 9.38 Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30, respectively. Your company, wishing to avoid foreign exchange risk, sells £500,000 forward 90 days. Assuming that the spot rate remains the same 90 days hence, your company would a) receive £500,000 90 days hence b) receive more than £500,000 in 90 days
c) have been better off not to have sold pounds forward d) receive nothing Ans: c Section: Forward market hedge Level: Difficult 9.39 In 1993, Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%, both for one year. At the time Ford enters into these transactions, the spot rate for the peseta is $0.095. If the spot rate is Ptas. 1 = $0.087 in one year, what is the cost to Ford of this money market hedge? a) 2.0% b) 3.8% c) 1.3% d) Ford has a 6.5% gain, not a cost Ans: d Section: Forward market hedge Level: Difficult 9.40 DowDupont has entered into a currency risk sharing arrangement with British Gas. Under the contract, DowDupont agrees to pay British Gas a base price of $10 million for gas purchases, but the parties would share the currency risk equally beyond a neutral zone, specified as a band of exchange rates: $1.67-1.73:£1. Within the neutral zone, DowDupont must pay BG the pound equivalent of $10 million at the base rate of $1.70. Suppose the spot rate at the time of payment is £1 = $1.63. How much will DowDupont owe British Gas? a) $10 million b) $9,702,381 c) $9,588,235 d) $9,819,277 Ans: b Section: Currency risk sharing Level: Difficult The following information is to be used in answering questions 36-38. U.S. borrowing rate for 1 year = 9.5% U.S. deposit rate for 1 year = 8.7% French borrowing rate for 1 year = 11.3% French deposit rate for 1 year = 10.2% French franc spot quote = $0.1763-78 French franc 1-year forward quote = $0.1729-47
9.41 What value can Alcoa lock in for a receivable of FF 3 million due in one year if it executes a money market hedge today? a) $525,540 b) $516,545 c) $530,012 d) $520,940 Ans: b Section: Money market hedge Level: Difficult 9.42 What value can Alcoa lock in for its FF 3 million receivable if it executes a forward contract today? a) $518,700 b) $524,100 c) $528,900 d) $532,410 Ans: a Section: Forward market hedge Level: Difficult 9.43 Suppose Alcoa in 1995 had a payable of FF 1 million due in one year. Alcoa's cost of the payable using a money market hedge is ----- and its cost using a forward market hedge is -----. a) $173,900; $177,470 b) $174,925; $176,300 c) $176,671; $172,900 d) $178,937; $174,700 Ans: d Section: Money market hedge Level: Difficult 9.44 In 1990, Goodyear had operations in both Germany and the Netherlands. In the past the Dutch guilder and Deutsche mark were highly correlated in their movements against the U.S. dollar. If the Dutch unit has net inflows of guilders and the German unit has net inflows of DM, then Goodyear's combined transaction exposure a) approximately equals the sum of its guilder and DM exposures b) is less than the sum of its guilder and DM exposures because the currencies are highly correlated c) is less than the sum of its guilder and DM exposures because of diversification between the company‟s subsidiaries d) is not significant due to the highly correlated nature of the two currencies Ans:
a
Section: Cross-hedging Level: Difficult 9.45 In 1996, DEC hedges a FF 3.2 million receivable due in 180 days. The current spot rate is FF 1 = $0.18834 and the 180-day forward rate is FF 1 = $0.18625. If the spot rate at the end of 180 days is $0.18728, how much has the forward market hedge cost DEC? a) $6,688 b) $3,392 c) $3,296 d) DEC gains $6,688 on the hedge Ans: c Section: Forward market hedge Level: Difficult CHAPTER 10 Measuring and Managing Economic Exposure
10.1 During a home currency appreciation, exporters may pull out of markets that foreign competition makes ________. a) unprofitable b) more competitive c) profitable d) more liquid Ans: a Section: Market selection Level: Easy 10.2 Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change.
a) value b) current assets c) long-term liabilities d) competitive advantages Ans: a Section: Foreign exchange risk and economic exposure Level: Easy 10.3 The exposure that is based on competition with firms based in other currencies is known as a) translation exposure b) accounting exposure c) transaction exposure d) competitive exposure
Ans: d Section: Managing Operating Exposure Level: Easy 10.4 _______ exposure arises because currency fluctuations can alter a company‟s future revenues and expenses. a) transaction b) operating c) political d) translation Ans: b Section: Foreign exchange risk and economic exposure Level: Easy 10.5 Which of the following is true about the implementation of a hedging policy? a) it is difficult in practice b) untrained personnel can implement and monitor c) should be undertaken only when the effects of anticipated exchange rate changes are expected to be significant d) both a and c Ans: d Section: Financial management of exchange risk Level: Easy 10.6 With respect to home currency (HC) appreciation, the key issue for a domestic firm is its degree of ____. a) market share b) product differentiation c) marketing plan d) pricing flexibility Ans: d Source: Operating exposure Level: Easy 10.7 In the face of exchange rate volatility, developing a pricing strategy must address two key issues: a) market selection and segmentation b) market share and the work force c) market share and profit margin d) market share and segmentation Ans: c Section: Pricing strategy
Level: Easy 10.8 The _______ the price elasticity of demand, the _____ the incentive to hold down price and thereby expand sales. a) lower, greater b) lower, lower c) greater, lower d) greater, greater Ans: d Section: Pricing strategy Level: Easy 10.9 During periods of exchange rate volatility, firms dealing in _______ products face more exchange rate risk than the firms selling _________ products. a) low demand, high demand b) low supply, high supply c) undifferentiated, differentiated d) differentiated, undifferentiated Ans: c Section: Operating exposure Level: Easy 10.10 With respect to production management of exchange risk, ________ and plant location are the principal variables that companies change to manage competitive risks that cannot be dealt with through marketing changes alone. a) product innovation b) product retirement c) market selection d) product sourcing Ans: d Section: Production management of exchange risk Level: Easy 10.11 Domestic facilities that supply foreign markets normally entail ________exchange risk than do foreign facilities that supply local markets. a) greater b) lower c) equal d) none of the above Ans: a Section: Operating Exposure Level: Easy
10.12 One way an MNC may improve productivity in the face of exchange rate volatility is by revising ________. a) product offerings b) the input mix c) shifting production between plants d) the promotional strategy Ans: a Section: Product strategy Level: Easy 10.13 The greatest boost to a firm‟s competitiveness comes from compressing the time it takes to bring new and improved products to market also known as _________. a) product innovation b) the product cycle c) input mix d) market segmentation Ans: b Section: Planning for exchange rate changes Level: Easy 10.14 While the strategic marketing and production adjustments occur over the long run, financial management may finance the firm‟s operations such that shortfalls in cash flows during the adjustments are offset by a reduction in __________ expenses. a) marketing b) production c) debt-servicing d) hedging Ans: c Section: Financial management of exchange rate risk Level: Easy 10.15 A weak dollar will a) force American exporters to raise their foreign currency prices b) enable American importers to reduce their dollar costs c) enable American exporters to improve their profit margins d) cost American exporters market share abroad Ans: c Section: Real exchange rate changes and exchange rate risk Level: Medium
10.16 In 2022, U.S. companies such as Microsoft, Netflix, Tesla, and Proctor & Gamble noted currency headwinds ____their profits a) boosted b) had no effect on c) hurt d) neither of the above Ans: c Section: Competitive Effects of Real Exchange Rate Change Level: Medium 10.17 A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively ___ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility. a) high, low b) low, low c) low, high d) high, high Ans: a Section: Operating exposure Level: Medium 10.18 Which one of the following would NOT be an appropriate response for a U.S. exporter to appreciation of the dollar? a) raise the foreign currency price if the dollar appreciation was expected to be temporary and the cost of regaining market share was minimal b) move some production offshore if the appreciation were expected to persist for an extended period c) keep the foreign currency price constant if demand is quite elastic d) lower the foreign currency price if demand is inelastic for the product Ans: d Section: Operating exposure Level: Medium 10.19 Which one of the following areas is NOT a way companies often respond to exchange rate risk when they alter their product strategy? a) shifting the firm‟s manufacturing base to another country b) the timing of new-product introduction c) changing the size of its product line d) product innovation with advanced technology Ans: a Section: Product strategy Level: Medium
10.20 Which of the following strategies assumes that the MNC has already collected a portfolio of different facilities world wide? a) production shifting b) product innovation c) product sourcing d) raising productivity Ans: a Section: Shifting production among plants Level: Medium 10.21 For the strategy of product shifting to succeed, it is assumed the MNC has collected a) a portfolio of production facilities worldwide b) the funding of global banks c) a set of efficient production processes d) a collection of subsidiaries in low cost markets Ans: a Section: Shifting production among plants Level: Medium 10.22 When we examine operating exposure, the key issue for a domestic firm is its a) prior import competition b) pricing flexibility c) asset valuation adjustment d) low import content Ans: b Section: Operating exposure Level: Medium 10.23 Volkswagen almost went bankrupt in 1973 because a) it failed to offset the exchange risk associated with its cost structure and revenue structure with a suitable liability structure b) it gambled on the value of dollar c) it priced its cars in dollars d) it priced its cars in deutschemarks Ans: a Section: Financial management of exchange rate risk Level: Difficult
10.24 A company producing a differentiated product and competing with internationally diversified competitors will face a relatively __ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility. a) high, low b) low, low c) low, high d) high, high Ans: c Section: Operating exposure Level: Medium 10.25 The appropriate response for a U.S. exporter to depreciation of the dollar would be to a) raise the foreign currency price if the dollar depreciation was expected to be temporary and the cost of losing market share was minimal b) move some production offshore if the depreciation were expected to persist for an extended period c) lower the foreign currency price constant if demand is quite inelastic d) set up a netting center in the home country Ans: a Section: Characteristic economic effects of exchange rate changes Level: Difficult 10.26 Suppose McDonald's charges Ptas. 25 for a burger in Madrid. Its costs are Ptas. 18 per burger and these costs are not expected to change with the exchange rate. If the peseta devalues from $0.107 to $0.096, what price will McDonald's have to charge for its burgers to maintain its dollar profit margin? a) Ptas. 25.80 b) Ptas. 27.86 c) Ptas. 22.43 d) Ptas. 24 ANSWER: a Section: Calculating economic exposure Level: Difficult 10.27 Suppose Apple is selling Macintosh computers in 1996 in Germany for DM 5,500 when the exchange rate is DM 1 = $0.68. If the DM rises to $0.71, what price must Apple charge to maintain its dollar unit revenue? a) DM 5,147 b) DM 6,361 c) DM 5,743 d) DM 5,268
Ans: d: Section: Calculating economic exposure Level: Difficult 10.28 Following a devaluation of the Greek drachma, which of the following products sold in Greece is most likely to bear a drachma price increase? a) Fiat automobile, sold to the low end of the market b) Kentucky Fried Chicken dinner, facing competition from local fast food restaurants c) IBM mainframe computer, whose only competition comes from other American computer companies d) shirts from Hong Kong, facing competition from local manufacturers Ans: c Section: operating exposure Level: Difficult 10.29 In the face of an appreciating yen, Toyota should consider a) investing in U.S. production facilities b) raising its research and development investment c) coming out with new cars targeted at the low end of the market d) a and b only Ans: d Section: Operating exposure Level: Difficult 10.30 A U.S. exporter that anticipates an appreciation of the dollar should a) sell foreign currencies forward b) borrow foreign currencies c) scout out possible foreign production sites d) consider raising dollar prices on exports Ans: c Section: Planning for exchange rate changes Level: Difficult 10.31 Which of the following products is most likely to benefit from depreciation of the U.S. dollar? a) high-end signal processor from Hewlett-Packard that faces minimal competition b) Chevrolet automobile with a highly price elastic demand c) Mercedes-Benz auto facing price inelastic demand d) low-end Japanese machine tools Ans: b Section: Foreign exchange risk and economic exposure Level: Difficult
10.32 Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney, a large U.S. jet engine producer, faces substantial competition from Rolls-Royce, the British engine manufacturer. What would be the BEST way for P & W to cope with a dollar that has recently appreciated by 50%? a) accelerate R&D spending and cost-cutting efforts b) shift some of its production abroad c) raise the foreign currency prices of its engines sold abroad d) buy dollars forward Ans: a Section: Foreign exchange risk and economic exposure Level: Difficult 10.33 Which one of the following would not be an improvement from shorter product cycles to improve currency risk management? It would allow the firm to a) incorporate more up-to-date technology in its products b) respond more quickly to changing market conditions c) reduce the average price elasticity of demand d) increase the average price elasticity of demand Ans: d Section: Planning for exchange rate changes Level: Difficult 10.34 Nissan, the Japanese car manufacturer, exports a substantial fraction of its output to the United States. What financial measures would be suitable for Nissan to take to reduce its currency risk? a) borrow only yen to finance its operations b) borrow dollars to finance part of its operations c) sell yen forward in the amount of its annual shipments to the U.S. d) buy yen forward in the amount of its annual shipments to the U.S. Ans: b Section: The economic consequences of exchange rate changes Level: Difficult 10.35 Sumitomo Bank wants to expand its lending in the United States, but to do so it needs to raise more long-term debt capital to help finance these loans. Currently, long-term interest rates are 9.5% in the U.S. and 6.3% in Japan. What would you recommend Sumitomo do? a) raise yen in Japan because of the lower cost of money b) raise yen in Japan because Japanese investors are more patient than U.S. investors c) raise dollars in the U.S. to hedge against currency risk d) raise dollars in the U.S. to avoid depressing Tokyo stocks
Ans: c Section: The economic consequences of exchange rate changes Level: Difficult CHAPTER 11 International Financing and National Capital Markets 11.1 The most preferred form of securities for funding by firms in the U.S. has been a) debt b) preferred stock c) common stock d) stock derivatives Ans: a Section: Corporate sources and uses of funds Level: Easy 11.2 The issuer of corporate debt or equity will usually turn to a financing specialist to assist in designing and marketing the issue. The specialist is referred to as a a) investment banker b) underwriter c) arbitrageur d) universal banker Ans: a Section: Corporate sources and uses of funds Level: Easy 11.3 How is the investment banker compensated? a) by the spread between the purchase and sale price of the security they are marketing b) a flat fee on the total purchase value of the original issue c) a flat fee on the sale value of the original issue d) using a straight commission percentage on all sales they place of the securities Ans: a Section: Corporate sources and uses of funds Level: Easy 11.4 Usually placed with life insurance companies and pension funds, these bonds are sold directly to only a limited number of investors. They are known as a) publicly issued bonds b) credit swaps c) currency swaps d) privately placed bonds Ans: d Section: Corporate sources and uses of funds Level: Easy 11.5 Financial deregulation began in ____ in 1981. a) Italy b) Japan c) the U.S. d) France Ans:
c
Section: Financial markets versus financial intermediaries Level: Easy 11.6 The cost of the heavy reliance on banks by Japanese and German companies is a) less freedom of action b) higher interest charges on loans c) lower deposit rates d) more control by the government Ans: a Section: Financial systems and corporate governance Level: Easy 11.7 Which one of the following is NOT a consequence of a well-functioning financial market? a) greater capital accumulation b) better and more projects get financed c) lower cost of capital d) most projects get financed Ans: d Section: National Capital Markets as International Financial Centers Level: Easy 11.8 ______ is the process of replacing bank loans with securities issued in public markets. a) a drawdown b) securitization c) capital productivity d) regulatory arbitrage Ans: b Section: Financial markets versus financial intermediaries Level: Easy 11.9 The difference between countries in terms of company controls can be categorized into marketoriented and ____________ financial systems. a) bank-centered b) Anglo-Saxon c) debt-denominated d) keiretsu Ans: a Section: Financial systems and corporate governance Level: Easy 11.10 Suppose the government of Ghana is seeking concessionary financing to build 100 new schools, which of the following agencies is most likely to provide such financing? a) the World Bank b) the International Monetary Fund c) the International Finance Corporation d) the International Development Association Ans: d Section: Development banks Level: Easy
11.11 Suppose the government of Brazil is planning to develop a major hydroelectric project in order to replace oil imports and conserve scarce foreign exchange, which of the following international lending agencies is most likely to provide financing for this project? a) the World Bank b) the International Monetary Fund c) the International Finance Agency d) the International Development Agency Ans: a Section: The World Bank Group Level: Easy 11.12 The most important source of funds used by companies around the world is a) internally generated cash b) short-term external funds c) issues of new stock d) public debt securities Ans: a Section: Corporate sources and uses of funds Level: Easy 11.13 In 2018, the World Bank along with the Republic of Seychelles issued a ____bond focusing on the sustainable use of marine resources a) purple b) white c) blue d) red Ans: c Section: Green and other bonds Level: Easy 11.14 Dollar-denominated foreign bonds sold in the United States are called_________? a) Yankee bonds b) Shogun bonds c) Samurai bonds d) Global bonds Ans: a Section: Foreign Access to Domestic Markets Level: Easy 11.15 These are ordinary shares of a non-U.S. company listed and traded in the same form on any market in the world. They are known as a) global shares b) Yankee stock issues c) Samurai bonds d) exchange traded funds Ans: a Section: Foreign Access to Domestic Markets Level: Easy 11.16 Argentina is seeking balance-of-payments financing from an international lending institution. Which of the following is most likely to provide such funding?
a) the World Bank b) regional development banks c) the International Finance Corporation d) the International Development Agency Ans: a Section: Development banks Level: Easy 11.17 Selling stock overseas is attractive to corporations because it a) may raise the price of the company's stock b) improves the company's visibility in local markets
c) provides a pool of patient investors who are not focusing exclusively on next quarter's profits d) a and b only Ans: d Section: The foreign equity market Level: Easy 11.18 Which of the following banking practice would be found more often under the CEJ model of corporate governance? a) emphasis on shareholder value b) the importance of equity financing c) control by institutional shareholders d) universal banking
Ans:d Section: Financial systems and corporate governance Level: Easy 11.19 Project finance is distinctive from other financings because the providers of the funding a) look primarily to the cash flow from the project as the source of funds b) use the parent‟s assets to secure the funds c) merge the operations of the project with those of the parent d) have no exit plans Ans: a Section: Project finance Level: Easy 11.20 Which one of the following factors does NOT promote well-functioning financial markets? a) secure property rights b) high tariffs c) contracts that are easily enforced d) transparency in financial statements Ans: b Section: National Capital Markets as International Financial Centers Level: Medium 11.21 Which one of the following does NOT reflect the process of securitization?
a) new technology that has lowered the costs of compiling, accessing, and manipulating data
b) financial deregulation that requires more equity financing and higher cost of funds to banks c) lower costs of accessing public markets directly d) financial deregulation that made the search for funds less competitive for banks Ans: d Section: Financial markets versus financial intermediaries Level: Medium 11.22 The globalization of financial markets does NOT reflect a) financial deregulation, which spurs competition among markets b) reductions in currency controls and other government restrictions on cfree flow of capital internationally c) new technology that has lowered the cost of information d) a greater dependence on government subsidies for exports
Ans:d Section: Financial markets versus financial intermediaries Level: Medium 11.23 Why are privately placed bonds more difficult to sell than publicly issued bonds? a) they are usually commercial bank loans b) the presence of customized covenants c) funds come from private investors d) underwriting is required Ans: b Section: Corporate sources and uses of funds Level: Medium 11.24 Global growth in the financial markets is driven by each of the following EXCEPT: a) freer markets b) widely available information c) government capital controls d) financial deregulation by governments Ans: c Section: Globalization of financial markets Level: Medium 11.25 When the overwhelming majority of investors would be willing to pay more for the shares of a wellgoverned company, ___________ is improved. a) financial innovation b) regulatory arbitrage c) private placement d) capital productivity Ans: d Section: National capital markets as international financial centers Level: Medium 11.26 Which one of the following securities in the foreign bond markets has the least amount of risk to the investor? a) samurai bond b) shogun bond c) convertible bond d) equity warrants
Ans: c Section: The foreign bond market Level: Medium 11.27 Which one of the following new issues of stock has the greatest probability of lowering its cost of equity capital? a) Microsoft in the New York markets b) Toyota on the Tokyo exchange c) Apple stock on the London exchange d) IBM common stock on the New York Stock Exchange Ans: c Section: The foreign equity market Level: Medium 11.28 Which one of the following banks is considered the most important in the development bank industry? a) Asian Development Bank b) World Bank c) African Development Bank d) European Bank for Reconstruction and Development Ans: b Section: Development banks Level: Medium 11.29 The process of securitization reflects all of the following EXCEPT
a) new technology that has lowered the costs of compiling, accessing, and manipulating data b) financial deregulation that raised the cost of funds to banks c) lower costs of accessing public markets directly d) greater emphasis on customer relations Ans: d Section: Financial markets versus financial intermediaries Level: Medium 11.30 Which of the following has been MOST helped by the decline in the cost of accessing the public financial markets? a) smaller and less well-known companies b) larger firms who have an extensive global presence c) governments seeking to market their sovereign debt d) developing economies
Ans:a Section: Financial markets versus financial intermediaries Level: Medium 11.31 As the cost of gathering information on foreign firms continues to decrease, ___ should become an increasingly more cost- effective means of raising funds internationally. a) international securitization b) international financial intermediation c) international bank lending d) international portfolio investment
Ans: a Section: Globalization of financial markets Level: Difficult 11.32 Green bonds can be advantageous to firms because they can: a) increase the cost of capital for specific environmental projects b) signal to investors the company‟s commitment towards the environment c) allow companies to tap into a certain class of environmentally conscious investors d) both b and c Ans: d Section: Green and other bonds Level: Difficult 11.33 How does the World Bank raise funds? a) members‟ subscriptions b) by issuing bonds to private sources c) both a and b d) neither a nor b Ans: c Section: Development banks Level: Difficult 11.34 Which of the following bonds would NOT be found on the foreign bond markets? a) Yankee b) municipal c) samurai d) shogun Ans: b Section: The foreign bond market Level: Difficult 11.35 Which one of the following economic policies would the international financial markets tend to reward? a) increased tariffs b) reduced government ownership of private firms c) a system of government currency controls d) more government protection of infant-industries Ans: b Section: Globalization of financial markets Level: Difficult 11.36 Which of the following countries are important financial entrepôts? a) Luxembourg, Switzerland, The Bahamas b) The United Kingdom, France, and Germany c) The Netherlands, Belgium and Luxembourg d) Singapore, Bahrain, and France Ans: a Section: International Financial Markets Level: Difficult 11.37 Which legal system appears to best promote the formation of equity capital markets?
a) b) c) d)
Common Law French Civil Law Roman Law Scandinavian Civil Law
Ans: a Section: Financial Systems and Corporate Governance Level: Difficult 11.38 The legal system known as common law relies on which feature which is important for the development of financial markets? a) Judicial precedence b) Codified statutes c) The Napoleonic Code d) Quid pro quo arrangements Ans: a Section: Financial systems and Corporate Governance Level: Difficult 11.39 Which of the following countries have a legal system characterized as common law? a) France, Germany, and Italy b) The United Kingdom, Australia, and India c) Russia, Belarus, and Latvia d) Denmark, Sweden, and Norway Ans: b Section: Financial systems and Corporate Governance Level: Difficult 11.40 ArcelorMittal S.A. shares trade both in Paris in Euros and in New York in U.S. dollars, this is called a: a) American Depositary Receipt b) A European Depositary Receipt c) A Rule 144A private placement d) A cross-listing Ans: d Section: The Foreign Equity Market Level: Medium CHAPTER 12 THE EUROMARKETS 12.1 The dominant currency of the Eurocurrency markets is the a) U.S. dollar b) Euro c) Yen d) Pound Ans: a Section: The eurocurrency market Level: Easy 12.2 A dollar or other freely convertible currency deposited in a bank outside its country of origin is known as a) a Eurocurrency
b) fiat money c) a dragon bond d) a drawdown Ans: a Section: The Eurocurrency Market Level: Easy 12.3 What is the relationship between the euro currency of the European Union and Eurocurrency? a) The two have nothing to do with each other b) the euro is the underlying currency of the Eurocurrency markets c) the euro is the dominant and most common currency in the Eurocurrency markets d) the Eurocurrencies were first established using the European Union‟s euro Ans: a Section: The Eurocurrency Market Level: Easy 12.4 Eurodollar deposits represent the liabilities of a) European non-financial corporations b) the Organization of Petroleum Exporting Countries (OPEC) c) European banks and U.S. bank branches abroad d) European banks exclusively Ans: c Section: The Eurocurrency Market 12.5 Which one of the following was NOT a cause for the creation of the Eurodollar market? a) reserve requirements that lower a bank‟s earning asset base b) special charges and taxes levied on domestic banking transactions c) interest rate ceilings on deposits and loans d) the lack of a requirement to hold a fractional reserve at the Federal Reserve of all deposits Ans: d Section: Modern Origins Level: Easy 12.6 The supply of Eurodollar deposits is the result of a) Federal Reserve Board policy b) World Bank policy
c) a resolution of the member governments of the Organization of Economic Cooperation and Development (OECD) d) depositors holding dollars in non-US banks
Ans:d Section: The eurocurrency market Level: Easy 12.7 The U.S. LIBOR ceased on________. a) June 30, 2023 b) September 30, 2020 c) January 30, 2022
d) June 30, 2021 Ans:a Section: Euromarket Trends Level: Easy 12.8 The period over which the borrower may take down a Eurocurrency loan is known as the ______. a) maturity of the loan b) LIBOR rate c) Drawdown d) Margin Ans: c Section: Eurocurrency loans Level: Easy 12.9 Another name for the spread in a Eurocurrency loan is the _______. a) drawdown b) term c) LIBOR rate d) Margin Ans: d Section: Eurocurrency spreads Level: Easy 12.10 What is the replacement for the U.S. dollar London Interbank Offered Rate (LIBOR)? a) Secured Overnight Financing Rate (SOFR) b) Euro Short-Term Rate (ESTR) c) Sterling Overnight Index Average (SONIA) d) swap Ans: a Section: Eurodollar creation Level: Easy 13.11 Eurocurrency spreads are __________ the domestic money market spreads. a) wider than b) narrower than c) very similar to d) exactly the same as Ans: b Section: Eurocurrency spreads Level: Easy 13.12 One reason Eurocurrency deposit rates are higher than domestic rates is due to the fact that a) they have no relationship to domestic rates b) they must be higher to attract domestic depositors c) most borrowers are well-known d) a smaller percentage of deposits can be lent out Ans: b Section: Eurocurrency spreads Level: Easy
13.13 What is true about the Eurobond market? a) it is almost entirely free of official regulation b) it is self-regulated by the Association of International Bond Dealers c) both a and b d) none of the above Ans: c Section: Eurobonds Level: Medium 13.14 Historically, most Eurobonds have been ________ denominated. a) U.S. dollar b) yen c) euro d) pound Ans: a Section: Links between the Domestic and Eurobond Markets Level: Easy 12.15 The ________, which resembles the U.S. commercial paper market, allows borrowers to issue their own short-term euronotes. a) Eurobond market b) eurobank c) note issuance facility d) revolving underwriter facility Ans: c Section: Note issuance facilities and euronotes Level: Easy 12.16 One advantage of the Euro-commercial paper market over its American counterpart is a) flexibility that allows borrowers a range of currencies b) larger size of transactions c) greater liquidity d) greater transparency Ans: a Section: The Euro-Commercial Paper Level: Easy 12.17 Debt denominated in a foreign currency that is launched, priced and traded in Asia is referred to as a _________ bond. a) shogun b) samurai c) Asian-tiger d) dragon Ans: d Section: The Asia currency market Level: Easy 12.18 Which one of the following is the MOST obvious example of the globalization of financial markets? a) the creation of the European Union b) the rise of the Euromarkets
c) the end of the Soviet Union d) the Asian currency crisis of 1997 Ans: b Section: Introduction Level: Medium 12.19 Suppose the French government imposes an interest rate ceiling on French bank deposits. What is the likely effect of this regulation? a) reduce Euroeuro interest rates b) raise Euroeuro interest rates c) reduce the U.S. prime rate of interest d) raise the U.S. prime rate of interest Ans: a Section: Relationship between domestic and eurocurrency money markets Level: Medium 12.20 If the current 180-day inter-bank Eurodollar rate is 15% (all rates are stated on an annualized basis) and next period's rate is 13%, then a Eurocurrency loan priced at SOFR plus 1% will cost a) 16% this period and 16% next period b) 15% this period and 14% next period c) 16% this period and 14% next period d) none of the above Ans: d Section: Eurocurrency loans Level: Medium 12.21 Suppose that the current 90-day London interbank offer rate is 11% (all rates are stated on an annualized basis). If next period's rate is 10.5%, then a Eurodollar rate priced at SOFR plus 1% will cost a) 12% this period and 11.5% next period b) 11% this period and 10.5% next period c) 12% this period and 12% next period d) none of the above Ans: d Section: Eurocurrency loans Level: Medium 12.22 The multicurrency clause in the euro markets enables the borrower a) to avoid government actions to block funds b) to avoid local traders from arbitraging away profits c) to switch currencies on any rollover date d) to avoid political instability Ans: c Section: Multicurrency clauses Level: Medium 12.23 Suppose the U.S. government imposes added taxes on interest paid on American bank deposits. What is the likely effect of this regulation? a) raise Eurodollar interest rates b) reduce Eurodollar interest rates c) have no effect d) capital flight
Ans: b Section: Relationship between domestic and eurocurrency money markets Level: Difficult 12.24 Which one of the following have NOT led to a closer relationship between interest rates in national and Eurocurrency money markets?
a) tax treaties that reduce the incidence of double taxation on foreign-source income b) elimination of currency controls c) reduced cost of transatlantic telecommunications d) increased government regulation of U.S. interest rates Ans: d: Section: Eurobonds versus eurocurrency loans Level: Difficult 12.25 Which one of the following does NOT cause eurocurrency spreads to be narrower than in domestic money markets? a) Eurobanks don't have to maintain reserves on Eurodollar deposits b) Eurobanks face lower regulatory expenses
c) national banks are often required to lend money to certain borrowers at concessionary rates d) U.S. Federal Reserve bank regulations to cap interest rates charged on loans in the U.S. Ans: d Section: Relationship between Domestic and Eurocurrency Money Markets Level: Difficult CHAPTER 13
International Portfolio Management 13.1 Which one of the following is NOT a risk spelled out by the U.S. Securities and Exchange Commission regarding the risks associated with international investing? a) changes in currency exchange rates b) dramatic changes in market value c) political, economic and social events d) glut of foreign market information Ans: d Section: The Risks and Benefits of International Equity Investing Level: Easy 13.2 In its publication that spells out the risks, the SEC recommended one way to reduce the risk of dramatic changes in market value was to invest a) for the long term b) for the short term c) using derivatives such as American Depository Receipts d) in foreign stock exchanges Ans: a Section: The Risks and Benefits of International Equity Investing Level: Easy 13.3 The returns of hedged, internationally diversified, bond portfolios exhibited __________volatility than the returns of unhedged bond portfolios during the period from 1980 to 1986.
a) lower b) higher
c) no d) none of the above is correct Ans: a Section: Hedging Currency Risk Level: Easy 13.4 The SEC warned that foreign equity markets may have lower trading volumes and fewer listed companies that added risk due to a) lack of liquidity b) dramatic changes in market value c) changes in the currency exchange rate d) less information Ans: a Section: The Risks and Benefits of International Equity Investing Level: Easy 13.5 While there is systematic risk within a nation, it may be ______ and diversifiable outside the country after constructing a global portfolio. a) temporary b) somewhat temporary c) non-systematic d) permanent Ans: c Section: International diversification Level: Easy 13.6 The efficient frontier is the set of portfolios that has the ________ standard deviation for its level of expected return. a) smallest possible b) greatest possible c) most feasible d) least correlated Ans: a Section: Correlations and the gains from diversification Level: Easy 13.7 The lack of ________ , indicated by the ability to buy and sell securities efficiently, is a major obstacle on some overseas exchanges. a) diversification b) foreign ownership c) liquidity d) solvency Ans: c Section: Barriers to international diversification Level: Easy 13.8 Similar to American Depositary Receipts, these investment product differ in that they are generally traded on two or more markets outside the foreign issuer‟s home market. They are known as a) Global Depositary Receipts b) Global Registered Share
c) American Depository Shares d) Global mutual funds Ans: a Section: Depositary Receipts Level: Easy
13.9 A decomposition of the total dollar return of a foreign investment would NOT include which of the following? a) dividend/interest income b) capital gains (losses) c) currency gains (losses) d) the cost of hedging Ans: d Section: Measuring the total return from foreign portfolio investing Level: Easy 13.10 ________ are certificates of ownership by a U.S. bank offered as a convenience to investors in lieu of the underlying shares the bank holds in custody. a) Emerging market indexes b) Regional funds c) American depositary receipts d) American derivative claims Ans: c Section: Depositary Receipts Level: Easy 13.11 These are markets that represent some of the smallest, but fastest-growing, economies in the world. They are referred to as a) emerging markets b) frontier markets c) euro markets d) emerging market indices Ans: b Section: Investing in Emerging Markets Level: Easy 13.12 Instead of buying foreign stocks overseas, investors can buy foreign equities traded in the United States in the form of a) American Depositary Receipts b) American shares c) global funds d) a and b only Ans: d Section: Depositary Receipts Level: Easy 13.13 In the past, investing in emerging markets offered _______ risk and _________ returns. a) the highest, the highest b) the lowest, the highest c) the highest, the lowest
d) the lowest, the lowest Ans: a Section: Investing in emerging markets Level: Easy
13.14 One of the barriers to international diversification is the lack of information that is not readily __________ nor ___________ for global investors. a) provided, comparable b) accessible, comparable c) comparable, free d) provided, free Ans: b Section: Barriers to international diversification Level: Easy 13.15 Recent global market behavior that threatens the benefits of international portfolio diversification indicates that markets tend to be most ________ when volatility is greatest. a) uncorrelated b) stable c) correlated d) unstable Ans: c Section: Recent correlations Level: Easy 13.16 The difference between a global fund and an international fund is the global fund a) invests anywhere in the world excluding the United States b) invests anywhere in the world including the United States c) invests only outside the United States d) invests in individual countries Ans: b Section: International Mutual Funds Level: Medium 13.17 Suppose the initial price of a French bond is €850, the coupon income is €70, the end-of-period bond price is €1,000, and the franc devalues by 6% against the dollar during the period. What was the bond's total dollar return during the period? a) 8.24% b) 18.33% c) 25.88% d) 27.44% Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium 13.18 Suppose an investor buys a Taiwanese bond with a face value of NT20,000, which is priced at NT$19,500 and bears a coupon of NT$1,700. At the end of the year, the investor sells the bond at a price of NT$18,030. During the year, the exchange rate goes from NT$1 = U.S.$0.0375 to NT$1 = U.S.$0.0425. What was the investor's U.S. dollar return on this bond? a) 13.33%
b) 4.23% c) -5.69% d) 14.67% Ans: d Section: Measuring the total return from foreign portfolio investing Level: Medium 13.19 A Thai baht bond with a coupon of 9.5% is initially priced at its face value of Bt 1,000. At the end of one year, the bond is selling for Bt 1,050. If the initial spot rate was Bt 25 = $1, at what end- of-year exchange rate will the dollar return on the bond just equal 10%? a) Bt 1 = $0.0384 b) Bt 1 = $0.0416 c) Bt 1 = $0.0482 d) Bt 1 = $0.0324 Ans: a Section: Measuring the total return from foreign portfolio investing Level: Medium 13.20 A Canadian bond is initially priced at its face value of C$1,000. At the end of the year, the bond is selling for C$1,100. If the Canadian dollar appreciates by 10%, with a 5.5% coupon, what will the U.S. dollar return on the bond equal at the end of the year? a) 1.05% b) 27.1% c) 15% d) 20% Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium 13.21 Hong Kong bond with a coupon of 10% is initially priced at HK$1,000. At the end of the year, the bond is selling for HK$1,200. If the Hong Kong dollar depreciates by 5%, what will the U.S. dollar return on the bond equal at the end of the year? a) 10% b) 13% c) 23.5% d) 31% Ans: c Section: Measuring the total return from foreign portfolio investing Level: Medium 13.22 Suppose an investor buys a Japanese bond with a coupon rate of 10% at its price of ¥1,100. The bond‟s face value is ¥1,000. At the end of the year, the bond is selling at ¥1,050 and the ¥ has depreciated by 10%. What is the dollar return on the bond at the end of the year? a) -15.6% b) -5.91% c) 10.3% d) 15.8% Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium
13.23 A Euro bond with a coupon rate of 10% is initially priced at its face value of €1000. At the end of the year, the bond is selling at €1,070. If the € appreciates by 12% during the year, what is the end- of-year dollar return on the bond? a) 130% b) 105% c) 31.04% d) 95% Ans: c Section: Measuring the total return from foreign portfolio investing Level: Medium 13.24 A Brazilian bond with a coupon rate of 20% is initially priced at its face value of R$1,000. At the end of the year, the bond is selling at R$1,050. If the real depreciates by 75%, what is the dollar return at the end of the year? a) -155% b) -68.75% c) 9.5% d) 8.5% Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium 13.25 A Brazilian bond with a coupon rate of 15% is initially priced at its face value of R$1,000. At the end of the year, the bond is selling at R$950. During the year, the exchange rate goes from R$1 = U.S.$0.75 to R$1 = U.S.$0.85. What is the bond's total dollar return during the period? a) 15% b) 10% c) 22.67% d) 31.25% Ans: c Section: Measuring the total return from foreign portfolio investing Level: Medium 13.26 A French bond with a coupon rate of 3% is initially priced at its face value of €100. At the end of the year, the bond is selling at €95. During the year, the exchange rate goes from €1 = U.S.$1.1 to €1 = U.S.$1.2. What is the bond's total dollar return during the period? a) 6.9% b) -2.0% c) -5.1% d) -10.9% Ans: a Section: Measuring the total return from foreign portfolio investing Level: Medium 13.27 Suppose an investor buys a share of Sony at a price of ¥38,720 at the start of the year. During the year, the investor receives a dividend of ¥500. At the end of the year, the price of Sony is ¥49,560. During the year, the exchange rate goes from ¥150 = $1 to ¥175 = $1. What was the investor's dollar return on Sony? a) 29.29% b) 10.82% c) -3.24% d) -8.23%
Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium 13.28 Suppose you buy a share of Siemens at a price of €83. During the year, you receive a dividend of €2 and the € rises by 8%. If the stock price at yearend is €80, what was your total dollar return for the year? a) 10.60% b) 6.70% c) 9.83% d) 8.43% Ans: b Section: Measuring the total return from foreign portfolio investing Level: Medium 13.29 Suppose an investor buys a share of British Petroleum at a price of £32 at the start of the year. During the year, the investor receives a dividend of £1.5. At the end of the year, the price of BP is £34. During the year, the exchange rate goes from £1 = $1.78 to £1 = $1.63. What was the investor's dollar return on BP? a) -2.35% b) -6.47% c) 1.59% d) 10.94% Ans: c Section: Measuring the total return from foreign portfolio investing Level: Medium 13.30 International diversification provides a better risk-return trade-off than does investing solely in U.S. securities primarily because a) many foreign industries don't exist in the U.S. b) there are many more securities to choose from overseas c) the economic cycles of nations may not be perfectly in phase d) the foreign securities may follow U.S. markets in their price movements Ans: c Section: International diversification Level: Medium 13.31 Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard deviation of the non-U.S. portion of the world portfolio is 17.1%, and the correlation between the U.S. and non-U.S. market portfolios is .47. Suppose you invest 40% of your money in the U.S. stock market and the other 60% in the non-U.S. portfolio. What is the standard deviation of your portfolio? a) 17.7% b) 9.4% c) 15.1% d) 18.3% Ans: c Section: Correlations and the gains from diversification Level: Difficult 13.32 Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard deviation of the non-U.S. portion of the world portfolio is 17.1%, and the correlation between the U.S. and non-U.S. market
portfolios is .47. Suppose you invest 25% of your money in the U.S. stock market and the other 75% in the non-U.S. portfolio. What is the standard deviation of your portfolio? a) 16.7% b) 15.5% c) 17.1% d) 18.6% Ans: b Section: Correlations and the gains from diversification Level: Difficult 13.33 Which one of the following are NOT a barrier to international diversification. a) lack of foreign market liquidity b) easy convertibility of many currencies c) inadequate information d) lack of international accounting standards Ans: b Section: Barriers to international diversification Level: Difficult 13.34 Which of the following statements is most CORRECT with respect to international diversification? a) the gains from diversification may be diminished due to combined correlations accompanied by volatility in world markets b) world markets always seem to be most uncorrelated when volatility is present c) world markets have displayed relatively low and fixed correlations over the last five years d) global diversification produces gain even when world markets have correlations value near one. Ans: a Section: Correlations and the gains from diversification Level: Difficult 13.35 Suppose an investor buys a UK bond with a coupon rate of 8% at its price of £990. The bond‟s face value is £1,000. If the British pound depreciates by 5%, at what end- of-year selling price of this bond will the dollar return on the bond just equal 10%? a) 1062 b) 1100 c) 1000 d) 1300 Ans: a Section: Measuring the total return from foreign portfolio investing Level: Difficult 13.36 Suppose the correlation between the stock yen returns of Toyota and the USD/JPY exchange rate is 0.6. The standard deviation of the USD/JPY is 20% and the standard deviation of Toyota‟s stock yen returns are 30%. What is the standard deviation of Toyota‟s stock returns expressed in US dollars? a) 20.00% b) 20.20% c) 38.00% d) 44.94% Ans: d Section: Measuring exchange risk on foreign securities Level: Difficult
13.37 Suppose the correlation between the stock euro returns of Siemens and the USD/EUR exchange rate is 0.2. The standard deviation of the USD/EUR is 10% and the standard deviation of Siemens‟s stock euro returns are 15%. What is the standard deviation of Siemen‟s stock returns expressed in US dollars? a) 9.16% b) 13.00% c) 19.62% d) 38.50% Ans: c Section: Measuring exchange risk on foreign securities Level: Difficult 13.38 Suppose the correlation between the stock returns expressed in British Pounds of Rio Tinto and the USD/GBP exchange rate is -0.25. The standard deviation of the USD/GBP is 10% and the standard deviation of Rio Tinto‟s stock returns in British Pounds are 15%. What is the standard deviation of Rio Tinto‟s stock returns expressed in US dollars? a) 2.52% b) 6.25% c) 15.81% d) 20.00% Ans: c Section: Measuring exchange risk on foreign securities Level: Difficult 13.39 _________allows investors to enter or exit the funds as many times as they wish during the trading day. a) An Exchange Traded Fund b) A Global Mutual Fund c) An International Mutual Fund d) A Credit Default Swap Ans: a Section: Exchange Traded Funds Level: Easy 13.40 Rio Tinto the Anglo-Australian mining company has an ADR listed on the NYSE trading at $52.20 representing 1 ordinary share trading on the London Stock Exchange. If the current exchange rate is £1=$1.29 what is the no arbitrage value in British pounds of the ordinary share listed on the London Stock Exchange? a) £29.59 b) £40.47 c) £52.20 d) £67.34 Ans: b Section: Depositary Receipts Level: Medium
CHAPTER 14 Country Risk Analysis 14.1 The two basic approaches to viewing political risk are from a a) firm‟s structure and operations b) regional-specific and a firm-specific perspective
c) country-specific and a regional-specific d) country-specific and a firm-specific perspective Ans: d Section: Measuring political risk Level: Easy 14.2 Frequently used indicators of political risk include economic factors but NOT a) inflation b) balance-of-payment deficits c) balance-of-payment surpluses d) health care reform Ans: d Section: Economic Stability Level: Easy 14.3 An index that attempts to incorporate all of the economic, social and political factors into an overall measure of the business climate is the a) Business Environment Rankings (BER) b) Per capital income rating c) Gross domestic product d) Consumer price index Ans: a Section: Attitudes and Other Subjective Aspects Level: Easy 14.4 The World Bank methodology estimates capital flight as: a) the sum of gross capital inflows and the current account surplus b) the difference of gross capital inflows and the current account deficit, more increases in foreign reserves c) the sum of gross capital inflows and the current account deficit, less increases in foreign reserves d) none of the above Ans: c Section: Capital Flight Level: Easy 14.5 One good indicator of political risk is a) the seriousness of capital flight b) the level of local interest rates c) the level of local tax rates d) a large middle class population Ans:
a
Section: Capital flight Level: Easy 14.6 Capital flight occurs for several reasons, most of which have to do with a) government regulations on interest rates b) high taxes on local investments c) the threat of government seizure of local assets d) inappropriate economic policies Ans: b Section: Capital flight Level: Easy 14.7 Creditor country risk analysis typically focuses on: a) five-year plans b) swaps c) willingness to repay d) ability to repay Ans: d Section: Country Risk Analysis in international Lending Level: Easy 14.8 The great economic lesson of the ill-fated, post-World War II experiment in Communism is that _________ work and command economies do not. a) state subsidies b) swaps c) five-year plans d) markets Ans: d Section: Market-oriented versus statist policies Level: Easy 14.9 A large government deficit relative to GDP, a high rate of money expansion accompanied by fixed exchange rates, along with substantial government expenditures are some of the common characteristics of _________ risk. a) exchange rate b) interest rate c) country d) investment Ans: c Section: Key indicators of country risk and economic health Level: Easy
14.10 A structure of incentives that rewards risk taking in productive ventures is an indicator of long-run _____________ health for a country. a) social b) political c) economic d) spiritual Ans: c Section: Key indicators of country risk and economic health Level: Easy 14.11 High tax rates are a key indicator of country risk because they a) destroy incentives to work, save, and invest b) create large government deficits relative to GDP c) involve substantial government expenditures yielding low rates of return d) corrupt a well-functioning legal system Ans: a Section: Key indicators of country risk and economic health Level: Easy 14.12 The state‟s best strategy is to provide basic _________ in order to promote economic growth. a) health care services b) benefits such as lifelong pensions for its workers c) economic and political stability d) natural resources Ans: b Section: Key indicators of country risk and economic health Level: Easy 14.13 What ultimately determines a nation‟s ability to repay foreign loans is its ability to generate ___________. a) hard currencies b) soft currencies c) more employment d) more imports Ans: a Section: Country Risk and the Terms of Trade Level: Easy 14.14 A system that substitutes state-owned or state-guided enterprises for the private sector is known as
a) socialism b) democratic socialism c) statism d) free market economy Ans: c Section: Key indicators of country risk and economic health Level: Easy 14.15 Which of the following are the most straightforward and workable solutions to economic stagnation? a) freeing interest rates and the exchange rate to move to market levels b) reducing state subsidies on consumer goods c) privatizing bloated state enterprises d) all of the above Ans: d Section: Key Indicators of Country Risk and Economic Health Level: Easy 14.16 When investing in a natural resource project, a mining firm would NOT add value to the project by a) taking out political risk insurance from the home government b) using foreign financing c) selling copper in advance to customers d) using local financing Ans: d Section: Key indicators of country risk and economic health Level: Medium 14.17 A nation is considered solvent and its economic policies sustainable, if its: a) debt/GDP ratio is projected to stay the same over time b) debt/GDP ratio rises c) debt/GDP ratio declines d) either a or c Ans: d Section: The Mathematics of Sovereign Debt Analysis Level: Medium 14.18 Which one of the following is a tough-minded economic policy that may halt capital flight? a) making utilities publicly owned b) granting government subsidies to local firms c) imposing protective tariffs
d) removing barriers to investment by foreigners Ans: d Section: Capital flight Level: Medium 14.19 An oil company would NOT manage its political risk in Nigeria by a) taking out political risk insurance b) using foreign non-recourse financing c) selling oil in advance d) using local financing Ans: d Section: Capital flight Level: Medium 14.20 Political risk is primarily a function of a) instability in the government b) uncertainty over property rights c) the level of violence in the society d) a country‟s national debt Ans: b Section: Attitudes and Other Subjective Aspects Level: Medium 14.21 The cost of austerity is determined primarily by
a) the nation‟s external debts b) the nation‟s external debts relative to it wealth, as measured by its gross domestic product.
c) swaps d) regulatory restrictions Ans: b Section: The Government‟s Cost/Benefit Calculus Level: Difficult 14.22 Which one of the following is NOT a measure of political instability? a) the number of political parties in one nation b) frequency of changes of government c) the level of violence d) conflicts with neighboring states Ans: a Section: Political Stability Level: Difficult
14.23 Which of the following foreign investments would be least subject to expropriation? a) an oil well in an LDC that is providing needed foreign exchange b) a coffee plantation that is producing beans for export c) an assembly plant for automobiles located in an LDC d) a tire making plant in an LDC that is substituting for tire imports Ans: c Section: Key indicators of country risk and economic health Level: Difficult 14.24 Which of the following factors analysts seek to determine a country‟s ability to pay its debt: a) ratio of debt to GDP b) primary budget balance c) growth rate of nominal GDP d) all of the above Ans: d Section: The Mathematics of Sovereign Debt Analysis Level: Difficult 14.25 To halt capital flight, which one of the following would NOT be a constructive measure governments may take? a) cutting budget deficits b) impose comprehensive capital controls c) sell off state-owned enterprises d) allowing for freer trade Ans: b Section: Capital flight Level: Difficult CHAPTER 15 THE COST OF CAPITAL FOR FOREIGN INVESTMENTS 15.1 The ________ for a given investment is the minimum risk-adjusted return required by the shareholders of the firm for undertaking that investment. a) cost of equity capital b) systematic risk c) all-equity beta d) weighted average cost of capital Ans: a Section: The cost of equity capital Level: Easy
15.2 Which country has a stock market data series of the same time span and quality as that of the United States? a) Europe b) Canada c) No other country d) China Ans: c Section: The relevant market risk premium Level: Easy 15.3 This may serve as a reasonable proxy for the required return on equity of a project when the returns and financial structure of the project are expected to be similar to those of the firm‟s typical project. It would be the a) corporate-wide cost of equity capital b) weighted average cost of capital c) project beta d) company beta Ans: a Section: The cost of equity capital Level: Easy 15.4 Since both the project risk and the project‟s financial structure can vary from the corporate norm, to reflect the actual values of the different cost components, it is necessary to a) adjust the costs and weights. b) always refer to the corporate weighted average cost of capital. c) adjust the project‟s beta. d) adjust the required rate of return of the project. Ans: a Section: The Weighted average cost of capital for foreign projects Level: Easy 15.5 One function of the cost of capital is to ________ for the firm. a) determine the debt to equity ratio b) value future cash flows c) determine the current ratio d) determine the current lending rate Ans: b Section: The cost of equity capital Level: Easy
15.6 According to modern capital market theory, an equilibrium relationship exists between an asset‟s required return and its associated risk, which can be represented by the _______ model. a) risk-return tradeoff b) capital asset pricing c) purchasing parity d) interest rate parity Ans: b Section: The cost of equity capital Level: Easy 15.7 What is the outcome when the cost of equity capital is combined with after-tax cost of debt? a) all-equity beta b) cost of capital c) weighted average cost of capital d) target capital structure Ans: c Section: The Weighted average cost of capital for foreign projects Level: Easy 15.8 When computing the weighted average cost of capital, the weighting should be proportional based on the ______ rather than the _____ value of the firm. a) book, market b) hypothetical, book c) market, analyst‟s d) market, book Ans: d Section: The Weighted average cost of capital for foreign projects Level: Easy 15.9 Systematic risk is that portion of return variability that a) can be eliminated through diversification b) cannot be eliminated unless fixed income securities are added to the portfolio c) can be reduced through diversification but not eliminated d) cannot be eliminated through diversification Ans: d Section: Discount rates for foreign investments Level: Easy 15.10 The U.S. market risk premium is the recommended market risk premium because: a) it is likely to be demanded by a U.S. company‟s mostly American investors
b) the betas of foreign subsidiaries can be estimated relative to the U.S. market c) it ensures inconsistency between the measure of systematic risk and price per unit of this systematic risk d) both a and b Ans: d Section: The relevant market risk premium Level: Medium 15.11 LDCs have greater ______ risk but offer the higher probability of diversification benefits. a) economic b) translation c) political d) operating Ans: c Section: Discount rates for foreign investments Level: Easy 15.12 One of the key issues in estimating foreign project betas is to find firms that are publicly traded that share _____ risk characteristics when compared to the project. a) different b) somewhat different c) uncorrelated d) similar Ans: d Section: Key Issues in estimating foreign project discount rates Level: Easy
15.13 When identifying proxy firms for a foreign project analysis, it is desirable to use _____ firms. a) local b) home country c) emerging market d) developed economy Ans: a Section: Proxy companies Level: Easy 15.14 In an effort to estimate a proxy beta, and, if foreign proxy companies are not available, a second alternative would be to find a a) proxy industry in the local market b) proxy industry in the parent company‟s market
c) U.S. industry beta for the project d) similar project that the company has completed successfully in the past. Ans: a Section: Proxy companies Level: Easy 15.15 In general, the dollar cost of borrowing local currency at an interest rate and currency change is the sum of the dollar interest cost plus a) the percentage change in the exchange rate. b) the fees associated with raising capital. c) the percentage difference between the corporate beta and the project beta. d) the percentage change in the forward exchange rate. Ans: a Section: The Cost of Debt Capital Level: Easy 15.16 The cost of capital for a General Foods Jell-O plant in Venezuela is likely to be a) lower than for a comparable plant in the U.S., because its systematic risk is probably lower b) higher than for a comparable U.S. plant because of the added risks associated with the unstable economic and political environment c) about the same because the systematic risk is likely to be very similar d) greatly impacted by the change in political parties in neighboring Colombia Ans: a Section: The cost of equity capital Level: Medium
15.17 The cost of capital for a project in Australia should theoretically a) equal the parent's weighted average cost of capital b) equal the required return for a similar investment in the U.S. c) equal the minimum rate of return necessary to induce investors to buy or hold the firm's stock d) depend on the riskiness of the project itself Ans: d Section: The cost of equity capital Level: Medium 15.18 Suppose that a foreign project has a beta of 1.12, the risk-free return is 9.3% and the required return on the market is estimated at 18%. Then the cost of capital for the project is
a) 17.21% b) 21.37% c) 19.04% d) 20.03% Ans: c Section: The cost of equity capital Level: Medium 15.19 The cost of capital for a project depends on a) the correlation between returns on the project and returns on a domestic market index b) the correlation between returns on the project and returns on a globally-diversified portfolio c) the correlation between returns on the project and returns on the firm's other activities d) whether the price of risk is set on a domestic or worldwide basis Ans: d Section: Weighted average cost of capital Level: Medium 15.20 The rate(s) at which investors capitalize the returns on foreign projects depends on all of the following EXCEPT a) whether shareholders are internationally diversified b) the relative costs of international diversification for the MNC and for individual investors c) the extent to which domestic systematic risk is unsystematic from a global standpoint d) the correlation between equity returns on different markets Ans: d Section: The impact of globalization on the cost of capital Level: Medium 15.21 Which project is likely to entail the least systematic risk? a) a Ford plant in Brazil producing engines for export to the U.S. b) a Coca Cola plant in Brazil selling locally c) a machine tool plant in Japan d) a computer disk drive plant in Germany Ans: b Section: Recommendations Level: Medium 15.22 The cost of capital for a project in Spain should a) equal the parent's weighted average cost of capital b) equal the required return for a similar investment in the U.S.
c) equal the minimum rate of return necessary to induce investors to buy or hold the firm's stock d) be a function of the riskiness of the project itself Ans: d Section: Discount Rates for Foreign Investments Level: Medium 15.23 Suppose that a foreign project has a beta of 1.12, the risk-free return is 8% and the required return on the market is estimated at 17%. Then, the cost of capital for the project is a) 24.2% b) 19.3% c) 18.1% d) 15.4% Ans: c Section: The cost of equity capital Level: Medium 15.24 Suppose that a foreign project has a beta of 0.85, the risk-free return is 12%, and the required return on the market is estimated at 19%. Then, the cost of capital for the project is a) 16.15% b) 17.95% c) 19% d) 21.23% Ans: b Section: The cost of equity capital Level: Medium
15.25 There is a high probability that the cost of capital for a foreign project will a) exceed the cost of capital for a comparable domestic project b) be no greater than the cost of capital for a comparable domestic project c) be the same as the cost of capital for a comparable domestic project d) exceed the investor‟s required rate of return Ans: b Section: The relevant base portfolio Level: Medium 15.26 The systematic risk of a project depends on a) the correlation between returns on the project and returns on the world market portfolio
b) the correlation between returns on the project and returns on a domestically-diversified portfolio c) whether investors hold a domestically- or globally-diversified portfolio d) the various political and economic risks the project is subject to Ans: c Section: Discount rates for foreign investments Level: Medium 15.27 Suppose that a foreign project has a beta of 1.15, the risk-free return is 13% and the required return on the market is estimated at 21%. Then, the cost of capital for the project is a) 24.2% b) 22.2% c) 19.3% d) 15.4% Ans: b Section: The cost of equity capital Level: Medium 15.28 Consider a project that costs $1 million today but yields no returns for several years. Once the project becomes productive, it yields $250,000 annually forever. Suppose two firms are examining this project, a Japanese firm with a cost of capital of 7% and a U.S. firm with a cost of capital of 13%. Approximately how many more years than the U.S. firm would the Japanese firm be willing to wait until the project starts generating cash? a) 14 years b) 5 years c) 24 years d) 3 years Ans: a Section: The cost of equity capital Level: Difficult 15.29 Assume an average dividend payout rate of 100% for both U.S. and Japanese companies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for U.S. firms. Based on the dividend growth model, in order for Japanese and U.S. companies to have the same average cost of equity capital, how much higher would the Japanese annual earnings growth rate have to be? a) 7.24% b) 6.31% c) 5.83% d) 8.39%
Ans: d Section: The cost of equity capital Level: Difficult 15.30 Assume an average dividend payout rate of 60% for U.S. companies and 35% for Japanese companies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for U.S. firms. Based on the dividend growth model, in order for Japanese companies to have the same 12% average cost of equity capital estimated for U.S. companies, how much higher would the Japanese annual earnings growth rate have to be? a) 8.74% b) 3.45% c) 7.60% d) 2.83% Ans: d Section: The cost of equity capital Level: Difficult 15.31 Suppose the euro is expected to appreciate by 4% annually against the dollar. If a company can borrow dollars at 9.3%, what is the highest interest rate it should be willing to pay to borrow euro, assuming it is trying to minimize its expected financing cost? a) 5.1% b) 4.3% c) 7.2% d) 8.9% Ans: a Section: The cost of equity capital Level: Difficult 15.32 Suppose the euro is expected to depreciate against the dollar by 2% annually and the 10-year franc interest rate is 11%. What is the after-tax expected dollar cost of issuing a 10-year franc bond if the French corporate tax rate is 40%? a) 5.93% b) 7.61% c) 4.47% d) 6.60% Ans: c Section: The cost of equity capital Level: Difficult 15.33 Capital structures of foreign affiliates should a) conform to the standards set by local companies b) vary in order to take advantage of opportunities to reduce overall risk and financing costs
c) be very similar to the parent's capital structure because this is what determines the firm's risk profile d) conform to the standards established by other foreign units Ans: b Section: Foreign subsidiary capital structure Level: Difficult 15.34 What is the sovereign spread? a) the return on a country‟s government debt minus the cost of capital b) the return on a country‟s government debt minus the treasury rate c) the return on a country‟s government debt plus the cost of capital d) the return on a firm‟s debt plus the treasury rate Ans: b Section: Using sovereign risk spreads Level: Difficult 15.35 The principal advantage(s) of investing in foreign affiliates in the form of debt instead of equity is to a) reduce taxes b) reduce the impact of currency controls c) both a and b d) there are no advantages Ans: c Section: Valuing low-cost financing opportunities Level: Difficult 15.36 A U.S. company that has issued euro bonds could hedge at least part of the exchange risk associated with those bonds by a) invoicing its exports to Germany in euro b) invoicing its imports from Germany in euro c) invoicing its exports to Germany in dollars d) invoicing its imports from Germany in dollars Ans: a Section: Foreign subsidiary capital structure Level: Difficult CHAPTER 16 Corporate Strategy and Foreign Direct Investment 16.1 Which of the following refers to the term “economic rent”? a) diminish returns b) excess returns that lead to negative net present c) excess returns that lead to positive net present values d) none of the above
Ans: c Section: Introduction Level: Easy 16.2 Which one of the following categories do firms such as 3M (United States), Philips N.V. (Netherlands), and Sony (Japan) belong to? a) cost minimizers b) aging multinationals c) mature multinationals d) innovation-based multinationals Ans: d Section: Innovation-Based Multinationals Level: Easy 16.3 Foreign direct investment would be the acquisition abroad of _______ by MNCs. a) sales offices b) distribution channels c) plant and equipment d) portfolio securities Ans: c Section: Introduction Level: Easy 16.4 _________ is the acquisition abroad of plant and equipment. a) Portfolio investment b) Financial investment c) Foreign direct investment d) Rationalization Ans: c Section: Introduction Level: Easy 16.5 Which of the following is necessary for firms to do in order to systematically pursue policies and investments congruent with worldwide survival and growth? a) awareness of those investments that are likely to be most profitable b) selection of the optimal mode of entry c) continual audit of the effectiveness of current entry modes d) all of the above Ans: d Section: Designing A Global Expansion Strategy Level: Easy
16.6 As knowledge about a foreign market increases or as sales potential grows, the optimal market-penetration strategy will likely______. a) change b) unchange c) have no impact d) none of the above Ans: a Section: Auditing the Effectiveness of Entry Modes Level: Easy 16.7 When multinationals hold capital in the form of trademarks, patents, and general marketing skills, it is referred to as a) intangible capital. b) real assets. c) tangible capital. d) foreign direct investment Ans: a Section: Product and factor market imperfections Level: Easy 16.8 Multinationals own intangible capital in the form of _________. a) fees and royalties b) direct investment across industries c) global expansion strategies d) trademarks, patents, and general marketing skills Ans: d Section: Product and factor market imperfections Level: Easy 16.9 ________ direct investment is an investment that is cross-border but within an industry. a) Horizontal b) Vertical c) Parallel d) Intangible Ans: a Section: Product and factor market imperfections Level: Easy 16.10 Firms focusing on cost reduction must have __________ capability to seek out lower-cost production sites. a) global-scanning
b) integration c) rationalization d) knowledge-seeking Ans: a Section: Cost reduction Level: Easy 16.11 When multinational firms create barriers to entry by continually introducing new products and differentiating existing ones, both domestically and internationally, we may refer to them as ___ multinationals. a) mature b) senescent c) innovation-based d) politically risky Ans: c Section: Innovation-based multinationals Level: Easy 16.12 Economies of _______ exist whenever the same investment can support multiple profitable activities less expensively in combination than separately. a) scale b) size c) distance d) scope Ans: d Section: The mature multinationals Level: Easy 16.13 Whenever the same investment can support multiple profitable activities less expensively in combination than separately, it is said the following exists: a) economies of scale b) economies of scope c) lowest unit cost pricing d) diseconomies of scale Ans: b Section: The mature multinationals Level: Easy 16.14 Successful multinational corporations are those that can a) acquire lower-cost raw materials or labor abroad b) be the first entrant in large foreign markets c) institutionalize the process of creating and transferring competitive advantages abroad
d) acquire the patent for new technology first from a foreign government Ans: c Section: Product and factor market imperfections Level: Easy 16.15 Economies of _________exists when increasing production leads to a lessthan-proportionate increase in costs. a) scale b) scope c) dual currency boards d) exposure netting Ans: a Section: The mature multinationals Level: Easy 16.16 Which of the following term refers to describe the size of operations required in certain industries to compete effectively in the global market place? a) global integration b) globalization c) universal production d) world-scale Ans: d Section: Economies of scale Level: Easy 16.17 One advantage of the senescent multinational is its ______ capability. a) cross investment b) vertical integration c) global scanning d) horizontal direct investment Ans: c Section: The aging multinationals Level: Easy 16.18 In industries characterized by rapid production innovation and technical breakthroughs by foreign competitors, the ________ firms are known to excel. a) German b) British c) Japanese d) American Ans: c Section: Knowledge seeking
Level: Easy 16.19 _________ often provides multinationals with a valuable method to reduce currency and political risks. a) multiple sourcing b) knowledge seeking c) economies of scale d) economies of scope Ans: a Section: Multiple sourcing Level: Easy 16.20 To gain_________, multinationals must continually invest in developing new ones that are transferable overseas and not replicated by competitors. a) exchange rate hedges b) brand names c) competitive advantages d) international diversification Ans: c Section: Estimating the longevity of a competitive advantage Level: Easy 16.21 If a firm‟s competitive advantage is easily replicated, both local and foreign competitors will soon apply the same processes and a) enter the market to compete b) enter into a joint venture with the firm that has the competitive advantage c) engage in an advertising campaign to increase its sales and market share d) find other less competitive markets to enter and compete Ans: a Section: Estimating the longevity of a competitive advantage Level: Easy 16.22 Which one of the following would NOT be considered intangible capital? a) trademarks b) inventories c) patents d) general marketing skills Ans: b Section: Product and factor market imperfections Level: Medium 16.23 The most important element in determining whether and how a firm should expand overseas is
a) the degree of government subsidies and protection provided b) whether the firm's competitive advantages can be transferred abroad and how this can best be done c) the correlation between the domestic and world economies d) the extent of political risk overseas Ans: b Section: Product and factor market imperfections Level: Medium 16.24 Foreign direct investment is most likely to be economically viable in those settings where a) possible contractual difficulties make it costly to coordinate economic activities via arm's length transactions in the marketplace b) a firm is interested in accessing low-cost resources overseas c) a firm is interested in selling its patented products abroad d) the local government is most corrupt Ans: a Section: Product and factor market imperfections Level: Medium 16.25 Matsushita has leveraged its investment in advertising and distribution of Panasonic products in a number of consumer and industrial markets, ranging from PCs to VCRs. This is an example of a) economies of scale b) economies of scope c) exploiting the learning curve d) risk minimization Ans: b Section: The mature multinationals Level: Medium 16.26 In a mature industry, the most important barriers to entry are NOT likely to be a) technology b) economies of scale c) economies of scope d) excise tariffs Ans: d Section: The mature multinationals Level: Medium
16.27 When foreign multinationals invest in one another’s domestic markets to gain market share overseas, the strategy is known as ______. a) exporting b) reference investment c) direct investment d) cross- investment Ans: d Section: The mature multinationals Level: Medium 16.28 Which one of the following multinational categories emphasizes spending large amounts of funds on research and development? a) the mature multinational b) the innovation-based multinational c) the senescent multinational d) the hybrid that combines the mature with the senescent multinational Ans: b Section: The innovation-based multinationals Level: Medium 16.29 When automakers adopted just-in-time manufacturing and inventory systems, the only way to meet the logistic challenges for the tire industry was to ________. a) shift manufacturing overseas b) decrease the sales force domestically c) resort to innovative marketing techniques d) raise prices Ans: a Section: Foreign direct investment and survival Level: Medium 16.30 With respect to a global approach to investment planning, which one of the following modes of entry started in the 1980s? a) franchising b) acquisition of a state-owned enterprise c) licensing d) exporting Ans: b Section: Selecting a mode of entry Level: Medium 16.31 Which one of the following was NOT a strategy used by the Japanese firm, Canon, in its attempts to enter the U.S. copier market that was dominated by Xerox?
a) leasing rather than selling its copiers b) creating low-end copiers c) designing reliability and serviceability into its machines d) using standardized components to reduce costs Ans: a Section: Auditing the effectiveness of entry modes Level: Medium 16.32 From a portfolio standpoint, the value of foreign direct investment depends on all of the following EXCEPT: a) whether shareholders are internationally diversified b) the relative costs of international diversification for the MNC and for individual investors c) the extent to which domestic systematic risk is unsystematic from a global standpoint d) the extent of economies of scale and scope Ans: d Section: Financial market imperfections Level: Difficult 16.33 The basic Japanese strategy for international expansion has been to a) invest heavily in R&D and come in with innovative products at the high end of the market and over time move into the lower end of the market b) start at the low end of the market, build volume and scale economies, and then move into the high end of the market c) take advantage of American companies who were afraid of cannibalizing their sales of high-margin products d) b and c only Ans: d Section: Knowledge seeking Level: Difficult 16.34 Apex Inc., a maker of consumer products, has certain organizational skills. These skills include knowing how best to service a market through new-product development and adaptation, quality control, advertising, distribution, and after-sales service. Based on these skills, Apex's best avenue to international expansion would appear to be a) exporting b) licensing a local firm to produce its goods c) local production d) joint venturing with a local firm Ans: c Section: Designing a global expansion strategy Level: Difficult
16.35 The choice of whether to sell abroad by exporting, licensing foreign producers, or manufacturing abroad depends on all of the following EXCEPT a) the nature of government regulations b) whether the firm's competitive advantage can be transferred abroad in the products it sells or can be written down and clearly transmitted c) whether customers are looking for some signals as to the firm's commitment to the local market d) transfer pricing policies of the parent MNC Ans: d Section: Designing a global expansion strategy Level: Difficult 16.36 Corporate international diversification will prove beneficial to shareholders a) since operating in a number of countries whose economic cycles are not perfectly in phase reduces the variability of MNC earnings b) to the extent that multinationals can supply an indirect means of international diversification to individual investors c) only if individual investors face barriers to direct international portfolio investment d) when markets grow more cross-correlated in their price movements Ans: c Section: Financial market imperfections Level: Difficult 16.37 Which one of the following strategies do the senescent multinationals NOT follow when the competitive advantages in their product lines or markets become dissipated? a) enter new markets where little competition currently exists b) use the firm's global-scanning capability to seek out lower cost production sites c) production rationalization and integration worldwide d) seek favorable contracts from local country officials Ans: d Section: The aging multinationals Level: Difficult CHAPTER 17 Capital Budgeting for the Multinational Corporation 17.1 The _______ is defined as the present value of future cash flows discounted at the project‟s cost of capital minus the initial net cash outlay for the project. a) net present value b) equity-adjusted present value c) cost of capital d) value additivity principle
Ans: a Section: Net present value Level: Easy 17.2 According to the net present value (NPV) rule, projects with a positive NPV should be a) accepted b) rejected Ans: a Section: Net present value Level: Easy 17.3 The most important but at the same time the most challenging part of project analysis is to calculate the a) total cash flows b) incremental cash flows c) value of the project added to the firm‟s value d) the amount a new product takes away from the sales of an already existing product Ans: b Section: Incremental cash flows Level: Easy 17.4 Cannibalization results when a new project takes away sales from the firm‟s a) weighted average cost of capital. b) existing product sales. c) incremental cash flows. d) working capital. Ans: b Section: Cannibalization Level: Easy 17.5 If the discount rate is based solely on the riskiness of the project‟s anticipated cash flows, we would refer to it as the a) all-equity rate b) weighted average cost of capital c) debt cost of capital d) all-equity beta Ans: a Section: Alternative Capital-Budgeting Frameworks Level: Easy 17.6 The most desirable property of the NPV criterion is that it evaluates a) investments in the same way as the company‟s subsidiaries b) new market innovations that are simple to identify c) investments the same way as the company‟s shareholders d) competitive advantages of the firm realistically Ans: c Section: Net present value Level: Easy 17.7 When the introduction of a new product takes sales away from the firm‟s existing products, it is known as ______.
a) cannibalization b) sales creation c) transfer pricing d) opportunity cost Ans: a Section: Cannibalization Level: Easy 17.8 When evaluating an investment, the MNC should consider the ____________ cash flows generated by the project. a) total b) variable c) incremental d) fixed Ans: c Section: Incremental cash flows Level: Easy 17.9 The ___________ at which the company‟s products or inputs are traded internally can significantly cause errors in evaluating the profitability of proposed investments. a) export licenses b) transfer prices c) opportunity costs d) market prices Ans: b Section: Transfer pricing Level: Easy 17.10 Which one of the following can cause significant errors in the calculation of free cash flows associated with a project? a) export licenses b) transfer prices c) opportunity costs d) market prices Ans: b Section: Transfer pricing Level: Easy 17.11 If all funds in a project are expected to be blocked by government action in perpetuity, the value of the project is _____. a) limited b) unlimited c) zero d) difficult to determine Ans: c Section: Blocked funds Level: Easy 17.12 ____________ such as better quality, faster time to market, and higher customer satisfaction can have a significant impact on corporate cash flows. a) Intangibles
b) Transfer prices c) Economies of scale of distribution d) Value additivity Ans: a Section: Accounting for intangible benefits Level: Easy 17.13 In capital budgeting what matters is not the project‟s total cash flow per period, but the ___________ cash flows generated by the project. a) sales-creating b) incremental c) base-case d) parent Ans: b Section: Incremental cash flows Level: Easy 17.14 A foreign project that is _____ when valued on its own can be ________ from the parent firm's standpoint. a) profitable, unprofitable b) unprofitable, profitable c) appreciated, depreciated d) depreciated, appreciated Ans: a Section: Estimation of parent cash flows Level: Medium 17.15 Given the differences that are likely to exist between parent and project cash flows, the relevant cash flows to use in project evaluation are the a) incremental worldwide cash flows received by the parent b) incremental worldwide project cash flows
c) incremental worldwide project cash flows that can be repatriated to the parent d) total worldwide cash flows generated by the project Ans: a Section: Parent versus project cash flows Level: Medium 17.16 Many multinationals are now making small investments in Eastern Europe. These investments a) may be valued using conventional discounted cash-flow analysis
b) will be overvalued using conventional discounted cash-flow analysis because of their high risks c) should be valued using an expanded internal rate of return value rule that considers the attendant options d) are best valued by using the payback period method Ans: b Section: Growth options and project evaluation Level: Medium 17.17 Which of the following is NOT a method for incorporating the additional political and economic risk into foreign investment analysis?
a) shortening the minimum payback period, b) raising the required rate of return of the investment c) adjusting cash flows to reflect the specific impact of a given risk d) hedging the expected risk of currency fluctuations with currency futures Ans: d Section: Political and economic risk analysis Level: Medium 17.18 An investment in the Mezzogiorno will receive a subsidized loan of $12 million from the Italian government. The loan bears an interest rate of 7% in contrast to a market rate of 10%. The loan principal must be paid back in 8 years. What is the present value of the interest subsidy? a) $360,000 b) $1.92 million c) $2.31 million d) $870,000 Ans: b Section: Net present value Level: Medium 17.19 Walt Disney Company is contemplating a new theme park somewhere in Southeast Asia. However, it is concerned about cannibalizing sales of Tokyo Disneyland. Walt Disney should a) not be concerned because if it doesn't build another theme park, another competitor will certainly do so b) not be concerned because the odds are that it will generate enough additional sales to offset any cannibalization that does take place c) be concerned because cannibalization is a real threat d) decrease the amount of transfer pricing between its subsidiaries Ans: c Section: Cannibalization Level: Medium 17.20 Suppose a firm projects cash flows of $2.5 million, $3 million, and $4 million for years 1, 2, and 3, respectively, on an initial investment in Ecuador of $22 million. The firm projects a perpetuity of $5 million in years 4 and beyond. If the required return on this investment is 17%, how large does the probability of expropriation in year 5 have to be before the investment has a negative NPV? Expected compensation in the event of expropriation is $3 million. a) 31% b) 42% c) 22% d) 49% Ans: c Section: Expropriation Level: Difficult 17.21 Global Industries (GI) is planning to use some existing equipment from its own facilities in a foreign project. The used equipment has a book value of $2 million but a market value of $6 million. If GI's marginal tax rate is 34%, what is its opportunity cost of using the used equipment in the foreign project? a) $2 million b) $3.25 million c) $6 million d) $4.64 million Ans:
d
Section: Estimation of project cash flows Level: Difficult 17.22 Suppose that a subsidiary operates in a foreign country with a corporate tax rate of 42% and a withholding tax on dividends of 5%. If the U.S. parent has surplus foreign tax credits, what is the marginal rate of tax on remitted profits from the subsidiary? a) 13% b) 34% c) 8% d) 5% Ans: d Section: Tax factors Level: Difficult 17.23 What is the expected real dollar value of the depreciation tax shield in year 10, assuming that the tax write-off is taken at yearend? a) $1.1 million b) $1.9 million c) $2.3 million d) $1.3 million Ans: d Section: Tax factors Level: Difficult 17.24 A new project is projected to yield $2.5 million annually in after-tax profit, based on a local corporate profit tax rate of 40%. However, this profit figure depends on the use of a transfer price of $30 per unit on a component bought from the parent. If the project requires 100,000 units of this component annually, the impact on project profitability and on parent profitability of a boost in the transfer price to $35 will be _______ and ________, respectively. The parent's marginal tax rate is 34% and the incremental tax on subsidiary remittances to the parent is -3%. a) -$500,000, +$500,000 b) -$300,000, +$330,000 c) -$300,000, +$321,000 d) +$500,000, -$500,000 Ans: c Section: Tax factors
Level: Difficult 17.25 General Tin (GT) is worried that its mine in Peru will be expropriated during the next 12 months. The Peruvian government has promised, however, to pay compensation of $15 million at the year's end if it expropriates the mine. GT believes that this promise would be kept. If expropriation does not occur this year, it will not occur anytime in the foreseeable future. The mine is expected to be worth $50 million at the end of the year. A wealthy Peruvian has just offered GT $19 million for the mine today. If GT's risk-adjusted discount rate is 22%, what is the probability of expropriation at which GT is just indifferent between selling now or holding on to its mine? a) 71.2% b) 76.6% c) 23.5% d) 18.9%
Ans: b Section: Expropriation Level: Difficult
CHAPTER 18 Managing the Internal Capital Markets of Multinational Corporations 18.1 The value of the multinational financial system is NOT based on the ability to take advantage of a) tax arbitrage b) financial market arbitrage c) regulatory system arbitrage d) differing political systems between subsidiaries Ans: d Section: The value of the multinational financial system Level: Easy 18.2 Through which one of the following does the MNC have considerable freedom to transfer funds, allocated profits or both? a) financial channels b) supply chains c) economies of scope d) transfer prices Ans: a Section: The value of the multinational financial system Level: Easy 18.3 When MNCs transfer funds among foreign units to earn higher risk-adjusted yields on excess funds, we say they are conducting a) regulatory arbitrage b) financial market arbitrage c) tax arbitrage d) centralization of fund management Ans: b Section: The value of the multinational financial system Level: Easy 18.4 Tax arbitrage a) arises when subsidiary profits vary due to local regulations b) occurs when firms move funds to lower tax jurisdictions c) arises when barriers to trade exist d) occurs due to the incidence of capital flight Ans:
b
Section: The value of the multinational financial system Level: Easy 18.5 MNCs may use _______ arbitrage to resist government price controls or union wage pressures. a) tax b) financial system c) regulatory d) triangular Ans: c Section: The value of the multinational financial system Level: Easy
18.6 Which one of the following would NOT be an important use of transfer pricing by a MNC? a) avoiding customs inspections b) avoiding exchange controls c) reducing taxes d) reducing tariffs. Ans: a Section: Transfer pricing Level: Easy 18.7 The type of tariff that levies import duties that are set as a percentage of the value of the imported goods is known as the a) ad valorem tariff b) protective tariff c) revenue tariff d) flat-rate tariff Ans: a Section: Transfer pricing Level: Easy 18.8 Subsidiaries A and B buy from and sell to each other. Suppose that A has excess cash, whereas B is short of cash. How can A funnel money to B? a) A can lead payments owed to B b) B can lag payments owed to A c) A can raise transfer prices on goods sold to B d) a and b only Ans: d Section: Leading and lagging Level: Easy
18.9 ______ is the pricing of internally traded goods for the purpose of moving profits to a more tax-friendly nation. a) Transfer pricing b) Leading and lagging c) Arm‟s length pricing d) Advanced pricing Ans: a Section: Transfer pricing Level: Easy 18.10 Using transfer prices may lead to _____. a) increased local taxes b) reduced ad valorem tariffs c) exchange rate controls d) decreased political risk Ans: b Section: Transfer pricing Level: Easy 18.11 One of the few legal means of moving funds internationally that an MNC has is the use of the a) transfer price mechanism b) intercompany loan c) back-to-back loan d) parallel loan Ans: b Section: Intercompany Loans Level: Easy 18.12 Re-invoicing centers are usually set up in __________ jurisdictions. a) economically secure b) politically stable c) high-tax d) low-tax Ans: d Section: Offshoring centers Level: Easy 18.13 One disadvantage of a re-invoicing center is _______ . a) less chance of local government suspicion b) less communication costs c) increased communications costs
d) more exchange rate risk Ans: c Section: Offshoring centers Level: Easy 18.14 One advantage of the use of fees or royalties to manage the MNC‟s cash flow is ____. a) less communications costs b) less exchange rate risk c) more favorable tax treatment by the parent country‟s government d) less suspicion by the host government Ans: d Section: Fees and royalties Level: Easy 18.15 Intercompany loans are useful during periods of ______ in the financial markets. a) credit rationing b) hyperinflation c) currency depreciations d) capital flight Ans: a Section: Intercompany loans Level: Easy 18.16 ______ from the foreign affiliates to the parent is still the MOST important method of transferring funds in the MNC. a) Parallel loans b) Leading and laggng c) Dividends d) Credit rationing Ans: c Section: Dividends Level: Easy 18.17 Which one of the following is a real rather than a financial flow? a) capital goods b) dividends c) equity investment d) credit on goods and services Ans: a Section: Mode of transfer
Level: Easy 18.18 Which one of the following is an example of a market imperfection in the domestic capital market? a) transactions costs b) costs of obtaining information c) ceilings on interest rates d) restrictions by nationality of investor Ans: c Section: Value Level: Easy 18.19 Which one of the following would government taxing authorities NOT use to establish arm‟s length prices? a) comparable uncontrolled price method b) resale price method c) cost-plus method d) the law of one price Ans: d Section: Tariffs Level: Medium 18.20 Leading and lagging is primarily of value because of a) tax regulations b) foreign exchange risk c) expropriation risk d) exchange and capital controls Ans: a Section: Leading and lagging Level: Medium 18.21 Suppose a firm earns $2.5 million before-tax in Spain. It pays Spanish tax of $1.3 million and remits the remaining $1.2 million as a dividend to its U.S. parent. The Spanish dividend withholding tax is 5%. Under current U.S. tax law, the parent will owe U.S. tax on this dividend equal to a) $1.15 million b) $552,000 c) nothing. It will also receive a foreign tax credit equal to $1.3 million. d) nothing. It will also receive a foreign tax credit equal to $510,000. Ans: d Section: Tax effects Level: Medium
18.22 Suppose affiliate A sells goods worth $1 million monthly to affiliate B on 30 day credit terms. A switch in credit terms to 120 days will involve a one-time shift in cash of a) $3 million from A to B b) $3 million from B to A c) $4 million from A to B d) $4 million from B to A Ans: a Section: Leading and lagging Level: Medium 18.23 The best way(s) to increase the present value of after-tax remittances from overseas is (are) to a) invest parent funds as debt rather than equity b) borrow in the local currency c) hedge exchange risk d) speed up the payment of dividends Ans: a Section: Equity versus debt Level: Medium 18.24 A French subsidiary that earns $1 million before-tax pays French tax of $.5 million and remits the remaining $.5 million as a dividend to its U.S. parent. It pays a 10% dividend withholding tax on its remittance. Under current tax law, the parent will owe U.S. tax on this dividend equal to a) $40,000 b) $460,000 c) $207,000 d) nothing. It will also receive a foreign tax credit of $210,000. Ans: d Section: Tax effects Level: Medium 18.25 A firm that earns $1 million before-tax in Brazil pays Brazilian tax of $250,000 and remits the remaining $750,000 as a dividend to its U.S. parent. It pays a 10% dividend withholding tax on its remittance. Under current U.S. tax law, the parent will owe U.S. tax on this dividend of a) $40,000 b) $340,000 c) $15,000 d) nothing. It will also receive a foreign tax credit of $90,000. Ans:
c
Section: Tax effects Level: Medium 18.26 The extensive system of foreign tax credits allows a) U.S. MNCs to lower their effective tax rate on foreign-source income to below the U.S. corporate tax rate b) governments to collect more taxes from MNCs c) reduce the amount of taxes they owe the host country d) MNCs to avoid double taxation on foreign-source income Ans: d Section: Tax Factors and the Tax Cuts and Jobs Act of 2017 Level: Medium 18.27 Suppose a foreign subsidiary earns $1 million after paying foreign income taxes of $800,000. If the subsidiary pays a dividend of $600,000, what is the amount of the indirect foreign tax credit that its parent will receive? a) $480,000 b) $800,000 c) $400,000 d) it receives no foreign tax credit Ans: a Section: Tax Factors and the Tax Cuts and Jobs Act of 2017 Level: Medium 18.28 Suppose a foreign subsidiary earns $2 million after paying foreign income taxes of $500,000. If the subsidiary retains all of its earnings, what is the amount of the indirect foreign tax credit that its parent will receive? a) $500,000 b) $250,000 c) $400,000 d) it receives no foreign tax credit Ans: d Section: Tax Factors and the Tax Cuts and Jobs Act of 2017 Level: Medium 20.29 Which one of the following cash flow mechanisms arouses the least suspicion from a host government concerning a multinationals attempts to avoid additional taxes? a) transfer pricing b) reinvoicing centers c) royalties d) leading and lagging Ans:
d
Section: Intercompany fund-flow mechanisms: costs and benefits Level: Medium 20.30 Leading and lagging strategies have several advantages EXCEPT a) no formal note of indebtedness is needed b) governments are less like to interfere with payments on intercompany accounts c) interest must be charged on all intercompany accounts d) intercompany accounts up to six months are interest free Ans: c Section: Leading and lagging Level: Medium 18.31 Arco ships 15 million barrels of refined oil monthly from Arco-Canada to Arco-U.S. Arco-U.S. has to pay a U.S. ad valorem tariff of 6%. Tax accountants advise Arco that it can set the transfer price in the range of $15-$18 per barrel of product. The current price is set at $16 a barrel. If Arco-Canada's tax rate is 50% (the U.S. rate is 46%., what is the incremental cash flow per month associated with using the optimal transfer price? a) $236,000 b) $1,343,000 c) $1,086,000 d) $32,670 Ans: c Section: Tariffs Level: Difficult 18.32 Suppose affiliate A sells 10,000 chips monthly to affiliate B at a unit price of $15. A's tax rate is 45% and B's tax rate is 55%. In addition, B must pay an ad valorem tariff of 12% on its imports. If the transfer price on chips can be set anywhere between $11 and $18, how much can the total monthly cash flow of A and B be increased by switching to the optimal transfer price? a) $3,000 b) $4,000 c) $1,840 d) $1,380 Ans: d Section: Tariffs Level: Difficult 18.33 Which of the following is NOT characteristic of a back-to-back loan? a) it is a method to reduce exchange rate risk b) it is also known as a fronting loan c) it is a loan channeled through a bank d) it is collateralized by the parent‟s deposit
Ans: a Section: Back-to-back loans Level: Difficult 18.34 Which one of the following is NOT a factor in developing a global remittance policy? a) number of financial links b) global investment yields c) ownership patterns d) volume of transactions Ans: b Section: Designing a global remittance policy Level: Difficult 18.35 Which one of the following is NOT an information factor in developing a global remittance policy? a) subsidiary financing requirements b) costs of external capital c) financial channels available d) inventory stocking policies Ans: d Section: Designing a global remittance policy Level: Difficult