International Finance multiple-choice questions

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1 International Finance multiple-choice questions 1. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $ day forward rate = $.62 a. $630,000. b. $610,000. c. $600,000. d. $590,000. e. $580, If U.S. inflation suddenly increased while European inflation stayed the same, there would be: a. an increased U.S. demand for euros and an increased supply of euros for sale. b. a decreased U.S. demand for euros and an increased supply of euros for sale. c. a decreased U.S. demand for euros and a decreased supply of euros for sale. d. an increased U.S. demand for euros and a decreased supply of euros for sale. 3. The Single European Act of 1987: a. reduced competition in most industries. b. eliminated competition in many industries. c. reduced efficiency in most industries. d. increased competition in most industries. 4. 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 5. When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are affected by translation exposure. When the dollar weakens, the reported consolidated earnings are affected. a. favorably; favorably affected but by a smaller degree b. favorably; favorably affected by a higher degree c. unfavorably; favorably affected d. favorably; unfavorably affected 6. Which one of the following areas is NOT a way companies often respond to exchange rate risk when they alter their product strategy?

2 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 7. The real cost of hedging payables with a forward contract equals: a. the nominal cost of hedging minus the nominal cost of not hedging. b. the nominal cost of not hedging minus the nominal cost of hedging. c. the nominal cost of hedging divided by the nominal cost of not hedging. d. the nominal cost of not hedging divided by the nominal cost of hedging. 8. Which of the following would likely have the least direct influence on a country's current account? a. inflation. b. national income. c. exchange rates. d. tariffs. e. a tax on income earned from foreign stocks. 9. Over time, international trade (exports plus imports) as a percentage of GDP has: a. increased for most major countries. b. decreased for most major countries. c. stayed about constant for most major countries. d. increased for about half the major countries and decreased for the others. 10. A perfect hedge (full coverage) on translation exposure can usually be achieved when: a. using the money market hedge. b. using the forward hedge. c. using the futures hedge. d. none of the above, since a perfect hedge is nearly impossible. 11. A recent study by McKinsey & Co. found that investors assign a higher value to firms that exhibit corporate governance standards and are likely to ethical constraints. a. high; not obey b. high; obey c. low; not obey d. low; obey 12. If the current 180 day inter-bank Eurodollar rate is 15% (all rates are stated on an annualized basis. and next period's LIBOR is 13%, then a Eurocurrency loan priced at LIBOR 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. 15% this period and 15% next period

3 13. is not a factor that affects the bid/ask spread. a. Order costs b. Inventory costs c. Volume d. All of the above factors affect the bid/ask spread 14. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: a. about.3621 Canadian dollars. b. about.3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars. 15. is not a bank characteristic important to customers in need of foreign exchange. a. Quote competitiveness b. Speed of execution c. Forecasting advice d. Advice about current market conditions e. All of the above are important bank characteristics to customers in need of foreign exchange. 16. Which of the following is not an advantage resulting from the Asian crisis that would favor direct foreign investment in Asia? a. strong local demand for products. b. low production costs. c. weak local currencies. d. all of the above are advantages. 17. LIBOR is: A) the interest rate commonly charged for loans between banks. B) the average inflation rate in European countries. C) the maximum loan rate ceiling on loans in the international money market. D) the maximum deposit rate ceiling on deposits in the international money market. E) the maximum interest rate offered on bonds that are issued in London. 18. Futures contracts are typically ; forward contracts are typically. A) sold on an exchange; sold on an exchange B) offered by commercial banks; sold on an exchange C) sold on an exchange; offered by commercial banks D) offered by commercial banks; offered by commercial banks 19. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar by %. A) depreciated; 5.80 B) depreciated; 4.00

4 C) appreciated; 5.80 D) appreciated; An increase in U.S. interest rates relative to German interest rates would likely the U.S. demand for euros and the supply of euros for sale. A) reduce; increase B) increase; reduce C) reduce; reduce D) increase; increase 21. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 7.10% 7.50% New Zealand dollar (NZ$) 6.80% 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast if correct, what will its dollar profit be from speculation over the five day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? A) $521,325. B) $500,520. C) $104,262. D) $413,419. E) $208, Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects: A) an increased demand for British pounds. B) a decrease in the demand for British pounds. C) an increase in the supply of British pounds for sale. D) a decrease in the supply of British pounds for sale. 23. Which of the following is an example of economic exposure but not an example of transaction exposure? A) An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. B) An increase in the pound's value increases the U.S. firm's cost of British pound payables. C) A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables. D) A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank. 24. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: A) definitely be above the 180 day forward rate.

5 B) definitely be below the 180 day forward rate. C) be about the same as the 180 day forward rate. D) none of the above; there is no relation between the futures and forward prices. 25. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? A) purchase Canadian dollars forward. B) purchase Canadian dollar futures contracts. C) purchase Canadian dollar put options. D) purchase Canadian dollar call options. 26. A firm will likely benefit most from diversifying if: A) the correlations between country economies are high. B) the correlations between country economies are low. C) the variability of all country economy levels is high. D) B and C 27. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid ask percentage spread is: A) about 4.44%. B) about 4.26%. C) about 4.03%. D) about 4.17%. 28. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate. 29. An increase in the current account deficit will place pressure on the home currency value, other things equal. A) upward B) downward C) no D) upward or downward (depending on the size of the deficit)

6 30. Forward contracts: A) contain a commitment to the owner, and are standardized. B) contain a commitment to the owner, and can be tailored to the desire of the owner. C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. D) contain a right but not a commitment to the owner, and are standardized. 31. are most commonly classified as a direct foreign investment. A) Foreign acquisitions B) Purchases of international stocks C) Licensing agreements D) Exporting transactions 32. Which of the following is true? A) Most forward contracts between firms and banks are for speculative purposes. B) Most future contracts represent a conservative approach by firms to hedge foreign trade. C) The forward contracts offered by banks have maturities for only four possible dates in the future. D) none of the above 33. Which one of the following is an advantage of international investing? a. you can invest in industries that don't exist in the United States b. you can invest in companies that have lower price earnings ratios c. you can invest in companies that are, on average, more profitable than similar U.S. firms d. you can invest in companies with lower market book value ratios 34. To force the value of the pound to appreciate against the dollar, the Federal Reserve should: A) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. B) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. C) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene. D) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market. 35. Consider two countries that trade with each other, called X and Y. Inflation in Country X will have a greater impact on inflation in Country Y under the system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the system. A) floating rate; fixed rate B) floating rate; floating rate C) fixed rate; fixed rate D) fixed rate; floating rate 36. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a: A) pegged system.

7 B) fixed system. C) managed float system. D) crawling peg system. 37. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: A) exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. B) exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. C) exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. D) exchange foreign currencies for dollars, and buy existing Treasury securities with dollars. 38. Due to, market forces should realign the relationâ ship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage 39. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate: A) U.S. investors could possibly benefit from covered interest arbitrage. B) British investors could possibly benefit from covered interest arbitrage. C) neither U.S. nor British investors could benefit from covered interest arbitrage. D) A and B 40. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: A) larger will be the forward discount of the foreign currency. B) larger will be the forward premium of the foreign currency. C) smaller will be the forward premium of the foreign currency. D) smaller will be the forward discount of the foreign currency. 1. The "J curve" effect describes the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross national product the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating the tendency for exporters to initially reduce the price of goods when their own currency appreciates the reaction of a country's currency to initially depreciate after the country's inflation rate declines 2. When the "real" interest rate is relatively low in a given country, then currency of that country is typically expected to be: Weak, since the country's quoted interst rate would be high relative to inflation rate Strong, since the country's quoted interest rate would be low relative to the inflation rate Strong, since the country's quoted interest rate would be high relative to the inflation rate Weak, since the country's quoted interest rate would be low relative to the inflation rate

8 3. When you own, there is no obligation on your part; however, when you own, there is an obligation on your part Call options; put options Futures contracts; call options Forward contracts; futures contracts Put options; forward contracts 4. Due to, market forces should realign the spot rate of a currency among banks. Forward realignment arbitrage Triangular arbitrage Covered interest arbitrage Loactional arbitrage 5. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: Follows their exchange rate movement Is due to their inflation differentials Is zero Is contestant over time C and D 6. is (are) not a determinant of translation exposure The MNC's degree of foreign involvement The locations of foreign subsidiaries The local (domestic) earnings of the MNC The accounting methods used 7. Springfield Co., based in the U.S. has a cost of goods sold attributable to foreign materials orders that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would a stronger dollar and would a weaker dollar. Benefit from, be unaffected by Benefit from; be adversely affected by Be unaffected by; be adversely affected by Be unaffected by; benefit from Benefit from; benefit from 8. A firm will likely benefit most from diversifying if: The correlations between country economies are high The correlations between country economies are low The variability of country economy levels is high B and C 9. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be affected by the project. If an MNC establishes a

9 foreign manufacturing subsidiary that busy components from the parent, the cash flows from prevailing operations would likely be affected by the project. Adversely; adversely Favorably; adversely Favorably; favorably Adversely; favorably 10. Which of the following factors is not expected to generally have a favorable impact on the firm's cost of capital according to the text? Easy access to international capital markets High degree of international diversification Volatile exchange rate fluctuations All of the above 11. Which of the following is a reason why commercial banks can facilitate international trade? The exporter may not wish to accept credit risk of the importer The government may impose exchange contracts that prevent payment by the importer to the exporter The exporter may need financing until payment for the goods is received All of the above 12. Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then: On average, the foreign effecting financing rate is greater than the domestic interest rate On average the foreign effect financing rate is less that the domestic rate The foreign effecting financing rate exceeds the U.S. interest rate when its forward rate exhibits a premium The foreign effective financing rate is less than the U.S. interest rate when it's forward rate exhibits a discount 13. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by: Borrowing domestically Borrowing a portfolio of foreign currencies that are not highly correlated Borrowing a portfolio of foreign currencies that are highly correlated Borrowing two foreign currencies that are negatively correlated 14. A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss franc is: Equal to the U.S. interest rate Less than the U.S. interest rate, but more than the Swiss interest rate Equal to the Swiss interest rate Less than the Swiss interest rate More than the U.S. interest rate 15. Assume that subsidiaries "X" and "Y" often trade with each other. Assume that Subsidiary "X" has excess cash while Subsidiary "Y" is short on cash. How can Subsidiary "X" help out Subsidiary "Y"?

10 "X" should lag its payments sent to "Y" to pay for imports from "Y". "X" should request that "Y" lead it's payment to be sent for goods that "Y" sent to "X" A and B None of the above 16. A common purpose of inter-subsidiary leading or lagging strategies is to: Allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds Assume that the inventory levels at subsidiaries are maintained within tolerable ranges Chance the prices a high-tax rate subsidiary charges a low-tax rate subsidiary Measure the performance of subsidiaries according to how quickly subsidiary remit dividend payments to the parent. 17. Assume the following information: Spot rate of Canadian dollar $ day forward rate of Canadian dollar $ day Canadian interest rate 4% 90-day U.S. interest rate 2.5% Given this information what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? Assume the investor invest $1,000, The value of Best Candy stock is sensitive to the price of sugar. In years where the Caribbean sugar crop fails, the price of sugar rises significantly and Best Candy suffers considerable losses. On the other hand, SugarKane, a large Hawaiian sugar company reaps unusual profits and its stock price soars. Assume the following probabilities of outcome and returns associated with each probability of outcome: Bullish Stock Market Bearish Stock Market Sugar Crisis Probability Best's Rate of Return 25% 10% -25% SugarKane Rate of Return 10% -5% 20% If Best Candy and SugarKane are combined in equal proportions into a portfolio, what will be the expected return and risk (standard deviation) of this portfolio? 19. Using the CAPM, what is the expected rate of return of a stock when its beta is 2.0, the expected return of the market is 12%, and the risk free rate is 5%? International Finance Multiple Choice 1. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is: a. Less than the domestic interest rate. b. Greater than the domestic interest rate. c. Equal to the domestic interest rate.

11 d. Greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount. 2. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: a. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. b. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. c. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. d. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. 3. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: a. Buying an identical futures contract. b. Selling an identical futures contract. c. Buying a futures contract with a different settlement date. d. Selling a futures contract for a different amount of currency.