Exam of Ocay (3rd)

Question 1

This involves taking a money market position to cover a future payables or receivables position

Answer 1

MONEY MARKET HEDGE

Question 2

This basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded

Answer 2

MONEY MARKET

Question 3

This can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments

Answer 3

LONG TERM FINANCING

Question 4

If all relevant public and private information is already reflected in today’s exchange rates, the foreign exchange market is

Answer 4

STRONG FORM EFFICIENT

Question 5

S1: Retained earnings is the amount of net income left over for the business after it has paid out dividends to its shareholders

S2: Excessive remittances means the amount, if any, calculated for a particular collection period, by which all estimated CRR charge collections remitted to the collection account during such collection period exceed actual CRR charge collections received by the servicer during such collection period

Answer 5

TRUE;TRUE

Question 6

S1: If the earnings due to the project will someday be remitted to the parent, the MNC needs to consider how the parent’s government taxes these earnings. If the parent’s government imposes a high tax rate on the remitted funds, the project may be feasible from the subsidiary’s point of view

S2: When earnings are remitted to the parent, they are normally converted from the subsidiary’s local currency to the parent’s currency. The amount received by the parent is therefore influenced by the existing exchange rate

Answer 6

TRUE;TRUE

Question 7

When an MNC’s parent assesses whether to invest funds in a foreign project, the firm takes into account that the project may periodically require the exchange of currencies. This refers to what corporate function?

Answer 7

CAPITAL BUDGETING DECISION

Question 8

This is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return

Answer 8

RISK

Question 9

S1: When MNCs consider engaging in DFI by acquiring a foreign company, they may face various barriers imposed by host government agencies. All countries have one or more government agencies that monitor mergers and acquisitions

S2: The governments of some countries may prevent DFI. If a country is susceptible to abrupt changes in government and political conflicts, the feasibility of DFI may be dependent on the outcome of those conflicts

Answer 9

TRUE; TRUE

Question 10

S1: Each country enforces its own environmental constraints. Some countries may enforce more of these restrictions on a subsidiary whose parent is based in a different country

S2: The local firms of some industries in particular countries have substantial influence on the government and will likely use their influence to prevent competition from MNCs that attempt DFI

Answer 10

TRUE; TRUE

Question 11

The actual forecast of the currency is a weighted average of the various forecasts developed

Answer 11

MIXED FORECASTING

Question 12

A third method for reducing transaction exposure which can limit the potential effect of any single currency’s movements on the value of an

Answer 12

MNC CROSS-HEDGING

Question 13

This contract is negotiated between the firm and a financial institution such as a commercial bank and, therefore, can be tailored to meet the specific needs of the firm

Answer 13

FORWARD CONTRACT

Question 14

This refers to the investment in domestic companies and assets of another country by a foreign investor

Answer 14

FOREIGN INVESTMENT

Question 15

This refers to the sensitivity of the firm’s contractual transactions in foreign currencies to exchange rate movements

Answer 15

TRANSACTION EXPOSURE

Question 16

S1: Capital budgeting analysis implicitly considers deflation, since variable cost per unit and product prices generally have been rising over time

S2: Capital budgeting analysis implicitly considers inflation, since variable cost per unit and product prices generally have been rising over time

Answer 16

FALSE;TRUE

Question 17

A corporate function where MNCs constantly face the decision of whether to hedge future payables and receivables in foreign currencies

Answer 17

HEDGING DECISION

Question 18

This method of forecasting exchange rates is based on fundamental relationships between economic variables and exchange rates

Answer 18

FUNDAMENTAL FORECASTING

Question 19

This refers to the attempt to reduce risk by investing in more than one nation

Answer 19

INTERNATIONAL DIVERSIFICATION

Question 20

This is a corporate organization that owns and controls the production of goods or services in at least one country other than its home country

Answer 20

MULTINATIONAL CORPORATIONS

Question 21

The process of developing forecasts from market indicators

Answer 21

MARKET-BASED FORECASTING

Question 22

This is the level of uncertainty businesses involved in international trade face. Specifically, it is the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation

Answer 22

TRANSACTION EXPOSURE

Question 23

S1: Withholding taxes must also be considered if they are imposed on remitted funds by the host government. Because after-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects must be determined on any proposed foreign projects

S2: The after-tax salvage value of most projects is difficult to forecast. It will depend on several factors, including the success of the project and the attitude of the host government toward the project

Answer 23

TRUE;TRUE

Question 24

This strategy involves adjusting the timing of a payment request or disbursement to reflect expectations about future currency movements

Answer 24

LEADING AND LAGGING

Question 25

If all relevant public information is already reflected in today’s exchange rates, the foreign exchange market is

Answer 25

SEMI-STRONG FORM EFFICIENT

Question 26

This is the price of one currency in terms of another currency

Answer 26

EXCHANGE RATE

Question 27

This indicate the degree to which two currencies move in relation to each other

Answer 27

CURRENCY CORRELATIONS

Question 28

This argument assumes that investors have complete information on corporate exposure to exchange rate fluctuations as well as the capabilities to correctly insulate their individual exposure

Answer 28

INVESTOR HEDGE

Question 29

A corporate function where the parent’s decision about whether a foreign subsidiary should reinvest earnings in a foreign country or remit earnings back to the parent may be influenced by exchange rate forecasts

Answer 29

EARNINGS ASSESSMENT

Question 30

S1: The price at which the product could be sold can be forecasted using competitive products in the markets as a comparison. A long-term capital budgeting analysis requires projections for not only the upcoming period but the expected lifetime of the project as well

S2: Like the price estimate, variable-cost forecasts can be developed from assessing prevailing comparative costs of the components (such as hourly labor costs and the cost of materials). Such costs should normally move in tandem with the future inflation rate of the host country

Answer 30

TRUE; TRUE

Question 31

This refers to the sensitivity of the firm’s cash flows to exchange rate movements

Answer 31

ECONOMIC EXPOSURE

Question 32

A corporate function where corporations that issue bonds to secure long-term funds may consider denominating the bonds in foreign currencies

Answer 32

LONGTERM FINANCING DECISION

Question 33

This forecasting method involves the use of historical exchange rate data to predict future values

Answer 33

TECHNICAL FORECASTING

Question 34

S1: International acquisition is a situation in which a company buys and takes control of a company in another country or the company that is bought

S2: Local acquisition is a situation in which a company buys and takes control of a company in another country or the company that is bought

Answer 34

TRUE;FALSE

Question 35

This is an investment strategy used to protect (hedge) against the risk of a declining asset price in the future and involves or using a derivative contract that hedges against potential losses in an owned investment by selling at a specified price

Answer 35

SHORT TERM HEDGING

Question 36

S1: Multinational corporations (MNCs) evaluate international projects by using multinational capital budgeting, which compares the benefits and costs of these projects

S2: Multinational corporations (MNCs) evaluate local projects by using multinational capital budgeting, which compares the benefits and costs of these projects

Answer 36

TRUE; FALSE

Question 37

This type of hedge is sometimes referred to as a proxy hedge because the hedged position is in a currency that serves as a proxy for the currency in which the MNC is exposed

Answer 37

CROSS-HEDGING

Question 38

S1: There is no consensus standard of business conduct that applies to all countries. A business practice that is perceived to be unethical in one country may be totally ethical in another

S2: The governments of some countries may prevent DFI. If a country is susceptible to abrupt changes in government and political conflicts, the feasibility of DFI may be dependent on the outcome of those conflicts

Answer 38

TRUE, TRUE

Question 39

When a regression model is used for forecasting, and the values of the influential factors have a lagged impact on exchange rates, the actual value of those factors can be used as input for the forecast

Answer 39

FUNDAMENTAL FORECASTING

Question 40

These are instruments that can easily be converted to cash and are also known as marketable securities or temporary investments

Answer 40

SHORT TERM INVESTMENT