Quiznetik

International Financial Management | Set 2

1. The biggest disadvantage of a fixed exchange rate is the

A. increased probability of high inflation.

B. tradeoff between supporting the exchange rate and adjusting the trade balance.

C. tradeoff between supporting the exchange rate and maintaining full employment.

D. increased probability of a trade deficit.

Correct : A. increased probability of high inflation.

2. The effect of a depreciation of the domestic currency on the trade balance is likely to

A. increase it in the short and long runs.

B. decrease it in the short run and increase it in the long run.

C. decrease it in the short and long runs.

D. increase it in the short run and decrease it in the long run.

Correct : B. decrease it in the short run and increase it in the long run.

3. Which of the following institutions is the most important participant in foreign currency markets?

A. A retail customer

B. A commercial bank

C. A foreign exchange broker

D. A central bank

Correct : D. A central bank

4. An increase in the U.S. demand for the euro

A. causes a rise in the dollar exchange rate.

B. causes the euro to appreciate.

C. causes the dollar to depreciate.

D. causes Euro Area goods to be relatively more expensive.

Correct : A. causes a rise in the dollar exchange rate.

5. Which of the following would NOT be a cause for an increased American demand for the euros?

A. The United States having lower interest rates than the Euro Area

B. Increased American demand for Euro Area goods

C. The expectation by speculators that the value of the euro is edging up

D. More economic expansion in the United States

Correct : B. Increased American demand for Euro Area goods

6. Which of the following is NOT one of the determinants of the gains of adopting a single currency?

A. A well-synchronized business cycle involving all member countries

B. The possibility of factors of production to freely move across borders

C. The willingness and ability of member countries to design policies to address regional imbalances that may develop

D. Widening the common market by allowing other countries to join

Correct : A. A well-synchronized business cycle involving all member countries

7. If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.

A. True

B. False

C. all

D. none

Correct : A. True

8. Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

A. fundamental forecasting.

B. technical forecasting.

C. market-based forecasting.

D. mixed forecasting.

Correct : B. technical forecasting.

9. If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:

A. underestimated the future exchange rates over time.

B. overestimated the future exchange rates over time.

C. forecasted future exchange rates accurately.

D. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

Correct : B. overestimated the future exchange rates over time.

10. Which of the following is true according to the text?

A. Forecasts in recent years have been very accurate.

B. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.

C. Forecasting errors are smaller when focused on longer term periods.

D. None of the above.

Correct : D. None of the above.

11. Which of the following is not a forecasting technique mentioned in your text?

A. accounting-based forecasting.

B. fundamental forecasting.

C. technical forecasting.

D. market-based forecasting.

Correct : A. accounting-based forecasting.

12. Which of the following is not a method of forecasting exchange rate volatility?

A. using the absolute forecast error as a percentage of the realized value.

B. using the volatility of historical exchange rate movements as a forecast for the future.

C. using a time series of volatility patterns in previous periods.

D. deriving the exchange rate's implied standard deviation from the currency option pricing model.

Correct : A. using the absolute forecast error as a percentage of the realized value.

13. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:

A. about .3621 Canadian dollars.

B. about 2.36 Canadian dollars.

C. about .3137 Canadian dollars.

D. about 2.51 Canadian dollars.

Correct : C. about .3137 Canadian dollars.

14. When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:

A. closing prices in the U.S. during the previous day.

B. closing prices in Canada during the previous day.

C. prevailing prices in locations where the foreign exchange markets have been open.

D. officially set by central banks before the U.S. market opens.

Correct : C. prevailing prices in locations where the foreign exchange markets have been open.

15. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

Correct : D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

16. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:

A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Correct : A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

17. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with

A. international monetary credits.

B. dollars.

C. yuan, the Chinese currency.

D. euros, or any other third currency.

Correct : C. yuan, the Chinese currency.

18. In the foreign exchange market, the of one country is traded for the of another country.

A. currency; currency

B. currency; financial instruments

C. currency; goods

D. goods; goods

Correct : A. currency; currency

19. Which of the following examples definitely illustrates a depreciation of the U.S. dollar?

A. The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.

B. The dollar exchanges for 250 yen and then exchanges for 275 francs.

C. The dollar exchanges for 100 francs and then exchanges for 120 yen.

D. The dollar exchanges for 120 francs and then exchanges for 100 francs

Correct : D. The dollar exchanges for 120 francs and then exchanges for 100 francs

20. By definition, currency appreciation occurs when

A. the value of all currencies fall relative to gold.

B. the value of all currencies rise relative to gold.

C. the value of one currency rises relative to another currency.

D. the value of one currency falls relative to another currency.

Correct : C. the value of one currency rises relative to another currency.

21. 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.

Correct : D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.

22. Under a fixed exchange rate system:

A. central bank intervention in the foreign exchange market is often necessary;

B. central bank intervention in the foreign exchange market is not necessary since rates do not move;

C. central bank intervention in the foreign exchange market is not permitt

Correct : A. central bank intervention in the foreign exchange market is often necessary;

23. Given a home country and a foreign country, purchasing power parity suggests that:

A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate;

B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

C. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate;

D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate;

Correct : B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

24. If purchasing power parity were to hold even in the short run, then:

A. quoted nominal exchange rates should be stable over time.

B. real exchange rates should tend to increase over time;

C. real exchange rates should tend to decrease over time;

D. real exchange rates should be stable over time;

Correct : D. real exchange rates should be stable over time;

25. The international Fisher effect suggests that should pound interest rates exceed US dollar interest rates:

A. the pound’s value will remain constant;

B. the pound will be at a discount on the dollar;

C. UK inflation rate will decrease.

D. the pound will depreciate against the dollar;

Correct : D. the pound will depreciate against the dollar;

26. Kalons ltd. is a UK-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?

A. purchase Canadian dollars forward.

B. purchase Canadian dollar futures contracts.

C. purchase Canadian dollar put options.

D. purchase Canadian dollar call options.

Correct : C. purchase Canadian dollar put options.

27. Which of the following is the most likely strategy for a UK firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

A. purchase a call option on francs.

B. sell a futures contract on francs.

C. obtain a forward contract to purchase francs forwa

Correct : B. sell a futures contract on francs.

28. 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

Correct : D. none of the above

29. European currency options can be exercised _; American currency options can be exercised _.

A. any time up to the expiration date; any time up to the expiration date

B. any time up to the expiration date; only on the expiration date

C. only on the expiration date; only on the expiration date

D. only on the expiration date; any time up to the expiration date

Correct : D. only on the expiration date; any time up to the expiration date

30. A UK corporation has purchased currency call options to hedge a 70,000 dollar payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it acts rationally?

A. £36,750

B. £1,050

C. £37,800

D. £38,850

Correct : D. £38,850

31. Conditional currency options are:

A. options that do not require premiums.

B. options where the premiums are canceled if a trigger level is reached.

C. options that allow the buyer to decide what currency the option will be settled in.

D. none of the above

Correct : B. options where the premiums are canceled if a trigger level is reached.

32. Which of the following are true regarding the options markets?

A. Hedgers and speculators both attempt to lower risk.

B. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.

C. Hedgers and speculators are both necessary in order for the market to be liqu

Correct : C. Hedgers and speculators are both necessary in order for the market to be liqu

33. The premium of a currency put option will increase if:

A. the volatility of the underlying asset goes up.

B. the time to maturity goes up.

C. the spot rate declines.

D. none of the above

Correct : D. none of the above

34. Which of the following is true of options?

A. The writer decides whether the option will be exercised.

B. The writer pays the buyer the option premium.

C. The buyer decides if the option will be exercis

Correct : C. The buyer decides if the option will be exercis

35. The purchase of a currency put option would be appropriate for which of the following?

A. Investors who expect to buy a foreign bond in one month.

B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

C. Corporations who expect to collect on a foreign account receivable in one month.

D. All of the above

Correct : B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

36. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325. The forward rate contains an annualized of _%.

A. discount; -18.75

B. premium; 18.75

C. discount; -18.46

D. premium; 18.46

Correct : B. premium; 18.75

37. Translation exposure reflects:

A. the exposure of a firm's ongoing international transactions to exchange rate fluctuations.

B. the exposure of a firm's local currency value to transactions between foreign exchange traders.

C. the exposure of a firm's financial statements to exchange rate fluctuations.

D. the exposure of a firm's cash flows to exchange rate fluctuations.

Correct : C. the exposure of a firm's financial statements to exchange rate fluctuations.

38. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

A. Diz ltd

B. Yanta ltd

C. the firms have about the same level of exposure.

D. neither firm has any exposure.

Correct : A. Diz ltd

39. Which of the following operations benefits from depreciation of the firm's local currency?

A. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.

B. purchasing foreign supplies.

C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.

D. A and B

Correct : C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.

40. Magent ltd. is a UK company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF 200 million and net outflows of DK 500 million. The present exchange rate of the SF is about £0.22 while the present exchange rate of the DK is £0.05. Magent ltd. has not hedged these positions. The SF and DK are highly correlated in their movements against the pound. If the pound weakens, then Magent ltd. will:

A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.

B. benefit, because the pound value of its DK position exceeds the pound value of its SF position.

C. be adversely affected, because the pound value of its SF position exceeds the pound value of its DK position.

D. be adversely affected, because the pound value of its DK position exceeds the pound value of its SF position.

Correct : A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.

41. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?

A. £150,000 outflow

B. £150,000 inflow

C. £1,666,000 inflow

D. £1,666,000 outflow

Correct : A. £150,000 outflow

42. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are _ correlated, the MNC's transaction exposure is relatively _.

A. negatively; high

B. negatively; low

C. positively; low

D. none of the above

Correct : B. negatively; low

43. The maximum one-day loss computed for the value-at-risk (VAR) method, does not depend on:

A. the expected percentage change in the currency for the next day.

B. the standard deviation of the daily percentage changes in the currency over a previous period.

C. the current level of interest rates.

D. the confidence level used.

Correct : C. the current level of interest rates.

44. Volusia, plc is a UK-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the pound value of the funds to be received is estimated at £500,000 for the euros and £300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the portfolio standard deviation?

A. 3.00%.

B. 5.44%.

C. 17.98%.

D. none of the above

Correct : B. 5.44%.

45. The __ the percentage of an MNC's business conducted by its foreign subsidiaries, the _ the percentage of a given financial statement item that is susceptible to translation exposure.

A. greater; smaller

B. smaller; greater

C. greater; greater

D. none of the above

Correct : C. greater; greater

46. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% forpounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

A. 5.13%.

B. 2.63%.

C. 4.33%.

D. 5.55%

Correct : A. 5.13%.

47. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

A. positive.

B. negative.

C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.

D. zero.

Correct : D. zero.

48. An example of cross-hedging is:

A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.

B. use the forward market to sell forward whatever currencies you will receive.

C. use the forward market to buy forward whatever currencies you will receive.

D. B and C

Correct : A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.

49. 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.

Correct : A. the nominal cost of hedging minus the nominal cost of not hedging.

50. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

A. sell euros forward.

B. write euro currency put options.

C. purchase euro currency call options.

D. purchase euros forward.

Correct : A. sell euros forward.

51. A _______ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.

A. long-term forward contract

B. currency swap

C. parallel loan

D. money market hedge

Correct : C. parallel loan

52. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?

A. £101,904

B. £101,923

C. £88,769

D. £84,919

Correct : D. £84,919

53. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today's spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:

A. 10%.

B. 20%.

C. 30%.

D. 50%.

Correct : C. 30%.

54. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180- day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).

A. 10%

B. 30%

C. 40%

D. 70%

Correct : D. 70%

55. Which of the following is the least effective way of hedging transaction exposure in the long run?

A. long-term forward contract.

B. parallel loan.

C. currency swap.

D. money market hedge.

Correct : D. money market hedge.

56. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

A. highly positive.

B. zero.

C. highly negative.

D. none of the above

Correct : C. highly negative.

57. The potential effect of exchange rate fluctuations on foreign direct investment is expressed as _____ exposure.

A. translation

B. transaction

C. conversion

D. economic

Correct : D. economic

58. Which of the following is not one of the steps for currency exposure management:

A. forecast the degree of exposure

B. develop a reporting system to monitor exposure and exchange rate movements

C. buying additional foreign subsidiaries

D. assign responsibility for hedging exposure

Correct : C. buying additional foreign subsidiaries

59. Operational techniques include:

A. diversification of a company’s operations

B. purchasing of currency options

C. exposure netting

D. both A and C

Correct : D. both A and C

60. A(n) _____ hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movements.

A. balance-sheet

B. forward market

C. money market

D. options market

Correct : D. options market

61. Which of the following are rules to use when choosing between forward contracts and currency options:

A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.

B. When the quantity of a foreign-currency cash outflow is unknown, buy the currency forward.

C. When the quantity of a foreign-currency cash flow is partially known and partially uncertain, use a forward contract to hedge the known and unknown portions.

D. When the quantity of a foreign-currency cash inflow is known, buy the currency forward.

Correct : A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.

62. An American firm has just bought merchandise from a British firm for £50,000 on terms of net 90 days. The U.S. company has purchased a 3-month call option of 50,000 pounds at a strike of $1.7 per pound and premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the U.S. company exercise the option at that time or buy British pounds in the spot market?

A. exercise the option

B. buys British pound spot

C. does not make any difference

D. cannot tell

Correct : A. exercise the option

63. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

A. Diz ltd

B. Yanta ltd

C. the firms have about the same level of exposure.

D. neither firm has any exposure.

Correct : A. Diz ltd

64. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?

A. £150,000 outflow.

B. £150,000 inflow

C. £1,666,000 inflow.

D. £1,666,000 outflow.

Correct : A. £150,000 outflow.

65. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

A. positive.

B. negative.

C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.

D. zero.

Correct : D. zero.

66. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will epreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

A. sell euros forward.

B. write euro currency put options.

C. purchase euro currency call options.

D. purchase euros forward.

Correct : A. sell euros forward.

67. A _______ involves an exchange of currencies between two parties, with a promise to re- exchange currencies at a specified exchange rate and future date.

A. long-term forward contract

B. parallel loan

C. currency swap

D. money market hedge

Correct : C. currency swap

68. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?

A. £101,904

B. £101,923

C. £88,769

D. £84,919

Correct : D. £84,919

69. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today's spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:

A. 10%.

B. 20%.

C. 30%.

D. 50%.

Correct : C. 30%.

70. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).

A. 10%

B. 30%

C. 40%

D. 70%

Correct : D. 70%

71. Which of the following is the least effective way of hedging transaction exposure in the long run?

A. long-term forward contract.

B. currency swap.

C. Parallel Loan

D. Money Market Hedge

Correct : D. Money Market Hedge

72. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

A. highly positive.

B. zero.

C. highly negative.

D. none of the above

Correct : B. zero.

73. With regard to hedging translation exposure, translation losses _; and gains on forward contracts used to hedge translation exposure _.

A. are not tax deductible; are taxed

B. are not tax deductible; are not taxed

C. are tax deductible; are taxed

D. are tax deductible; are not taxed

Correct : A. are not tax deductible; are taxed

74. Assume a UK firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _, which would be _ than the gain generated by the forward contract.

A. loss; smaller

B. gain; larger

C. loss; larger

D. gain; smaller

Correct : C. loss; larger

75. An effective way for an MNC to assess its economic exposure is to look at the firm's:

A. income statement.

B. retained earnings.

C. liquidity.

D. level of stockholder's equity.

Correct : A. income statement.

76. As opposed to transaction exposure, managing economic exposure involves developing a ________ solution.

A. short-term

B. immediate

C. long-term

D. none of the above

Correct : C. long-term

77. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30 day forward rate = $.62

A. $630,000.

B. $610,000.

C. $600,000.

D. $590,000.

Correct : D. $590,000.

78. 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

Correct : C. unfavorably; favorably affected

79. 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

Correct : C. changing the size of its product line

80. 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.

Correct : B. using the forward hedge.

81. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. Choices:

A. $1,169,000.

B. $1,099,000.

C. $1,106,000.

D. $1,143,100.

Correct : C. $1,106,000.

82. If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements, and is due to receive USD100,000 in 90 days, it could:

A. sell US dollars 90 days from now at the spot rate.

B. enter into a 90-day forward sale of US dollars for euros;

C. purchase US dollars 90 days from now at the spot rate;

D. enter into a 90-day forward purchase of US dollars for euros;

Correct : B. enter into a 90-day forward sale of US dollars for euros;

83. A forward currency transaction:

A. Sets the future date when delivery of a currency must be made at an unknown spot exchange rate

B. Calls for exchange in the future of currencies at an agreed rate of exchange

C. Means that delivery and payment must be made within one business day (USA/Canada) or two business days after the transaction date

D. Is always at a premium over the spot rate

Correct : B. Calls for exchange in the future of currencies at an agreed rate of exchange

84. Two important practical differences between the monetary/non-monetary method and the current rate method of translation is found in their treatment of:

A. Fixed assets and owner's equity

B. Issued share capital and retained earnings

C. Inventories and fixed assets

D. Monetary assets

Correct : C. Inventories and fixed assets

85. If the Indian subsidiary of a US firm has net exposed assets of Rp9,000,000 and the Indian rupee drops in value from Rp45.00/$ to Rp50.00/$, the US firm has a translation:

A. Loss of $25,000

B. Gain of $20,000

C. Loss of $20,000

D. Gain of $25,000

Correct : C. Loss of $20,000

86. If a UK parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

A. strengthening euro

B. stable euro

C. weak euro

D. B and C are both ideal.

Correct : A. strengthening euro

87. Assume the parent of a UK-based MNC plans to completely finance the establishment of its US subsidiary with existing funds from retained earnings in UK operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:

A. the cost of borrowing funds in the U.K.

B. the cost of borrowing funds in the U.S.

C. the parent's cost of capital.

D. A and B

Correct : C. the parent's cost of capital.

88. A firm considers an exporting project and will invoice the exports in pounds. The expected cash flows in pounds would be more difficult if the currency of the foreign country is ________.

A. fixed

B. volatile

C. stable

D. none of the above, as the firm is not exposed

Correct : B. volatile

89. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _ against their home currency, and if their cost of capital is relatively _.

A. appreciate; low

B. appreciate; high

C. depreciate; high

D. depreciate; low

Correct : A. appreciate; low

90. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _ in the host country and there are _ investment opportunities in the host country.

A. very high; limited

B. very low; limited

C. very low; numerous.

D. very high; numerous

Correct : B. very low; limited

91. A French-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to __________ its estimate of the previously computed net present value.

A. lower

B. increase

C. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV

D. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount

Correct : A. lower

92. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK 10,000,000 NOK 15,000,000 NOK 17,000,000 NOK 20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net

A. -$17,602.62.

B. $8,000,000.

C. $1,048,829.

D. $645,147.

Correct : D. $645,147.

93. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially

A. financed with retained earnings of the parent and of the subsidiary, then:

B. the parent's perspective should be used to evaluate a foreign project.

C. the subsidiary's perspective should be used to evaluate a foreign project.

D. the foreign project should enhance the value of both the parent and the subsidiary.

Correct : C. the subsidiary's perspective should be used to evaluate a foreign project.

94. An international project's NPV is _ related to the size of the initial investment and _ related to the project's required rate of return.

A. positively; positively

B. positive; negatively

C. negatively; positively

D. negatively; negatively

Correct : D. negatively; negatively

95. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _ in year 1 and _ in years 2 though 5.

A. depreciates; depreciates

B. appreciates; appreciates

C. depreciates; appreciates

D. appreciates; depreciates

Correct : C. depreciates; appreciates

96. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy's inflation will have:

A. a more pronounced impact on revenues than on costs.

B. a less pronounced impact on revenues than on costs.

C. the same impact on revenues as on costs.

D. none of the above

Correct : A. a more pronounced impact on revenues than on costs.

97. Which of the following is not true regarding a target's previous cash flows?

A. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.

B. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.

C. They are always good indicators of future cash flows.

D. All of the above are true.

Correct : C. They are always good indicators of future cash flows.

98. Which of the following would probably not cause the stock price of a foreign target to decrease?

A. Its expected cash flows decline.

B. General stock market conditions in the foreign country are deteriorating.

C. Investors anticipate that the target will be acquir

Correct : C. Investors anticipate that the target will be acquir

99. A previously undertaken project in a foreign country may no longer be feasible because:

A. the MNC is unable to raise sufficient funds in order to undertake the project.

B. the MNC's cost of capital has decreased.

C. the host government has increased its tax rates substantially.

D. exchange rate projections changed from a depreciation to an appreciation of the foreign currency.

Correct : C. the host government has increased its tax rates substantially.

100. Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:

A. the Chinese yuan would depreciate in the future.

B. the Chinese yuan would appreciate in the future.

C. the Chinese yuan would remain somewhat stable in the future.

D. none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

Correct : A. the Chinese yuan would depreciate in the future.

Quiznetik

International Financial Management | Set 2

1. The biggest disadvantage of a fixed exchange rate is the

2. The effect of a depreciation of the domestic currency on the trade balance is likely to

3. Which of the following institutions is the most important participant in foreign currency markets?

4. An increase in the U.S. demand for the euro

5. Which of the following would NOT be a cause for an increased American demand for the euros?

6. Which of the following is NOT one of the determinants of the gains of adopting a single currency?

7. If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.

8. Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

9. If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:

10. Which of the following is true according to the text?

11. Which of the following is not a forecasting technique mentioned in your text?

12. Which of the following is not a method of forecasting exchange rate volatility?

13. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:

14. When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:

15. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

16. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:

17. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with

18. In the foreign exchange market, the ________ of one country is traded for the ________ of another country.

19. Which of the following examples definitely illustrates a depreciation of the U.S. dollar?

20. By definition, currency appreciation occurs when

21. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

22. Under a fixed exchange rate system:

23. Given a home country and a foreign country, purchasing power parity suggests that:

24. If purchasing power parity were to hold even in the short run, then:

25. The international Fisher effect suggests that should pound interest rates exceed US dollar interest rates:

27. Which of the following is the most likely strategy for a UK firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

28. Which of the following is true?

29. European currency options can be exercised _______; American currency options can be exercised _______.

30. A UK corporation has purchased currency call options to hedge a 70,000 dollar payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it acts rationally?

31. Conditional currency options are:

32. Which of the following are true regarding the options markets?

33. The premium of a currency put option will increase if:

34. Which of the following is true of options?

35. The purchase of a currency put option would be appropriate for which of the following?

36. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325. The forward rate contains an annualized __________ of ___________%.

37. Translation exposure reflects:

39. Which of the following operations benefits from depreciation of the firm's local currency?

41. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?

42. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ___________ correlated, the MNC's transaction exposure is relatively ___________.

43. The maximum one-day loss computed for the value-at-risk (VAR) method, does not depend on:

45. The __________ the percentage of an MNC's business conducted by its foreign subsidiaries, the _________ the percentage of a given financial statement item that is susceptible to translation exposure.

47. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

48. An example of cross-hedging is:

49. The real cost of hedging payables with a forward contract equals:

50. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

51. A _______ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.

55. Which of the following is the least effective way of hedging transaction exposure in the long run?

56. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

57. The potential effect of exchange rate fluctuations on foreign direct investment is expressed as _____ exposure.

58. Which of the following is not one of the steps for currency exposure management:

59. Operational techniques include:

60. A(n) _____ hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movements.

61. Which of the following are rules to use when choosing between forward contracts and currency options:

64. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?

65. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

66. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will epreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

67. A _______ involves an exchange of currencies between two parties, with a promise to re- exchange currencies at a specified exchange rate and future date.

71. Which of the following is the least effective way of hedging transaction exposure in the long run?

72. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

73. With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.

75. An effective way for an MNC to assess its economic exposure is to look at the firm's:

76. As opposed to transaction exposure, managing economic exposure involves developing a ________ solution.

78. 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.

79. Which one of the following areas is NOT a way companies often respond to exchange rate risk when they alter their product strategy?

80. A perfect hedge (full coverage) on translation exposure can usually be achieved when:

82. If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements, and is due to receive USD100,000 in 90 days, it could:

83. A forward currency transaction:

84. Two important practical differences between the monetary/non-monetary method and the current rate method of translation is found in their treatment of:

85. If the Indian subsidiary of a US firm has net exposed assets of Rp9,000,000 and the Indian rupee drops in value from Rp45.00/$ to Rp50.00/$, the US firm has a translation:

86. If a UK parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

87. Assume the parent of a UK-based MNC plans to completely finance the establishment of its US subsidiary with existing funds from retained earnings in UK operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:

88. A firm considers an exporting project and will invoice the exports in pounds. The expected cash flows in pounds would be more difficult if the currency of the foreign country is ________.

89. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _______ against their home currency, and if their cost of capital is relatively _______.

90. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _______ in the host country and there are _______ investment opportunities in the host country.

93. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially

94. An international project's NPV is _________ related to the size of the initial investment and _________ related to the project's required rate of return.

95. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _________ in year 1 and _________ in years 2 though 5.

96. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy's inflation will have:

18. In the foreign exchange market, the of one country is traded for the of another country.

29. European currency options can be exercised _; American currency options can be exercised _.

36. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325. The forward rate contains an annualized of _%.

42. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are _ correlated, the MNC's transaction exposure is relatively _.

45. The __ the percentage of an MNC's business conducted by its foreign subsidiaries, the _ the percentage of a given financial statement item that is susceptible to translation exposure.

73. With regard to hedging translation exposure, translation losses _; and gains on forward contracts used to hedge translation exposure _.

78. 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.

89. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _ against their home currency, and if their cost of capital is relatively _.

90. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are _ in the host country and there are _ investment opportunities in the host country.

94. An international project's NPV is _ related to the size of the initial investment and _ related to the project's required rate of return.

95. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _ in year 1 and _ in years 2 though 5.