FIN 480 pre test Flashcards
chapter 1
T/F
If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.
F
使支部利益最大化，不代表总公司也最大会
T/F
A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an automatic increase in agency costs.
F
centralized management would not increase agency cost, but decentralized management would
T/F
A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary’s operations
T
T/F
A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary’s operation
T
T/F
The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.
F
Theory of Comparative Advantage: Specialization
increases production efficiency.
T/F
Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.
T
T/F
In a joint venture, one firm is obligated to provide another firm with a specialized sales or service strategy in exchange for periodic fees.
F
Joint Ventures
• A venture that is jointly owned and operated by two or more firms. A firm may enter the foreign market by engaging in a joint venture with firms that reside in those markets.
T/F
International trade is the most common form of direct foreign investment (DFI).
F
Acquisitions of Existing Operations is the most common form of direct foreign investment
T/F
Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time.
F
Once you may need to convert currencies, you are facing the exchange rate risk
The goal of a multinational corporation (MNC) is
a. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
b. The maximization of shareholder wealth.
c. The minimization of taxes remitted from foreign subsidiaries.
d. The maximization of social benefits resulting from actions such as the employment of foreign managers.
B
The goal of MNC is the maximization of shareholder wealth.
Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because
a. Monitoring of managers located in foreign countries is more difficult.
b. MNCs are relatively large.
c. Foreign subsidiary managers raised in different cultures may not follow uniform goals.
d. All of these choices are correct.
D
Which of the following is not a form of corporate control that can be used to reduce agency problems in MNCs?
a. Stock options
b. Investor monitoring
c. A decentralized management style
d. Hostile takeover threat
e. All of these choices are forms of corporate control that can be used to reduce agency problems in MNCs.
c
Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
a. Ensuring that all data are reported consistently among subsidiaries
b. Establishing a centralized database of information
c. Making executives more accountable for financial statements by personally verifying their accuracy
d. Speeding the process by which all departments and all subsidiaries have access to the data that they need
e. All of these choices are common methods used by MNCs to improve their internal control process.
e
Which of the following events would confirm the Theory of Comparative Advantage?
a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.
b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors.
c. A U.S. firm manufacturing computers imports the needed components from Taiwan.
d. All of these choices are correct.
e. None of these choices are correct.
c
Which of the following events would confirm the Product Cycle Theory?
a. A U.S. firm manufacturing computers imports the needed components from Taiwan.
b. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.
c. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors.
d. All of these choices are correct.
e. None of these choices are correct.
c
The most risky method(s) by which firms conduct international business is (are):
a. The establishment of new subsidiaries.
b. The acquisitions of existing operations.
c. Franchising.
d. [The acquisitions of existing operations.] and [The establishment of new subsidiaries.] only
e. All of these choices are correct.
d
The least risky method by which firms conduct international business is:
a. International Trade.
b. The establishment of new subsidiaries.
c. The acquisitions of existing operations.
d. Licensing
e. Franchising.
a
________ obligates a firm to provide a specialized sales or service strategy, support assistance, and possible an initial investment in exchange for periodic fees.
a. Licensing
b. A joint venture
c. International trade
d. Franchising
e. None of these choices are correct.
D
Which of the following is not mentioned in the text as a reason for the increased globalization of business?
a. Increased privatization in recent years
b. An increase in GNP of virtually all countries in recent years
c. Growth in direct foreign investment in recent years
d. An increased standardization of products and services across countries in recent years
e. An increase in international trade
B
并未涉及GNP数量在所有国家都明显增加
Which of the following is not mentioned in the text as an additional risk resulting from international business?
a. Exchange rate fluctuations
b. Financial risk
c. Political risk
d. Exposure to foreign economies
e. Country risk
B
Financial risk is not the additional risk resulting form international business
the risk of cash flow MNC
international economic condition
not from interest rate risk
Which of the following is not an example of how an MNC can be affected by exchange rate movements?
a. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency.
b. When the home currency weakens, products denominated in that currency become cheaper to foreign customers, which may increase foreign demand for the MNC’s products.
c. When the home currency strengthens, products denominated in that currency become more expensive to foreign customers, which may reduce foreign demand for the MNC’s products.
d. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a weaker home currency.
e. Due to exchange rate fluctuations, the number of units of a firm’s home currency needed to purchase foreign supplies can change even if suppliers have not adjusted their prices.
A，美元贬值，收入也会减少
不理解
Licensing obligates a firm to provide ________, while franchising obligates a firm to provide ________.
a. A specialized sales or service strategy; its technology
b. A specialized sales or service strategy; a specialized sales or service strategy
c. Its technology; its technology
d. Its technology; a specialized sales or service strategy
e. Its technology; an initial investment
D
Which of the following is not a way in which agency problems can be reduced through corporate control?
a. Acquisition of a foreign subsidiary
b. Executive compensation
c. Monitoring by large shareholders
d. Threat of hostile takeover
e. None of these choices are correct.
A
The valuation of an MNC should decline when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____.
a. increase; depreciate
b. decrease; appreciate
c. decrease; depreciate
d. increase; appreciate
C
?
The agency costs of an MNC are likely to be higher if it
a. scatters its subsidiaries across many foreign countries.
b. decreases its volume of international business.
c. uses a centralized management style.
d. B and C.
A
The agency costs of an MNC are likely to be higher if it
a. scatters its subsidiaries across many foreign countries.
b. decreases its volume of international business.
c. uses a centralized management style.
d. B and C.
C
According to the text, the valuation of an MNC with foreign subsidiaries is directly affected by:
a. exchange rate fluctuations
b. foreign political conditions
c. foreign economic conditions
d. It is affected by all of the above.
D
Assume that an American firm wants to engage in international business in which it establishes a large subsidiary in the foreign country. This strategy definitely represents ______________.
a. a joint venture
b. direct foreign investment
c. franchising
d. licensing
b
Which of the following is the most direct example of political risk in Spain for a U.S.-based MNC with a subsidiary in Spain?
a. Consumers in the U.S. may purchase products from companies in Spain.
b. Spain’s economy may decrease.
c. Spain’s government may impose special taxes on the subsidiary.
d. Spain’s government may change tax rates on income earned by local citizens.
C
Compared to international trade, direct foreign investment generally results in ____ exposure to international political risk and ____ exposure to international economic conditions.
a. lower; higher
b. higher; lower
c. higher; higher
d. lower; lower
C
Zest Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Zest Co. has increased since last month. What could have caused this increase in value?
a. a stronger Mexican economy
b. higher Mexican interest rates
c. appreciation of the Mexican peso
d. depreciation of the Mexican peso
C
Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
a. requiring executives to forecast future exchange rates
b. establishing a centralized database of information
c. speeding the process by which all departments and all subsidiaries have access to the data that they need
d. ensuring that all data are reported consistently among subsidiaries
A
Which of the following is mentioned in the text as a theory of international business?
a. theory of comparative advantage
b. imperfect markets theory
c. product cycle theory
d. All of the above are mentioned in the text as theories of international business.
D
T/F
The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.
T
Which of the following events would confirm the Imperfect Markets Theory?
a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. c. A U.S. firm manufacturing computers imports the needed components from Taiwan. d. All of these choices are correct. e. None of these choices are correct.
A
The agency costs of an MNC are likely to be higher if it
a. scatters its subsidiaries across many foreign countries. b. decreases its volume of international business. c. uses a centralized management style. d. B and C.
a. scatters its subsidiaries across many foreign countries.
The Sarbanes-Oxley Act caused corporate governance of MNCs to _________; it makes executives ____ accountable for verifying financial statements.
a. deteriorate; more b. improve; less c. deteriorate; less d. improve; more
D
According to the text, the valuation of an MNC with foreign subsidiaries is directly affected by:
a. exchange rate fluctuations b. foreign political conditions c. foreign economic conditions d. It is affected by all of the above.
D
Chapter 2
The balance of payments measures all transactions between domestic residents over time.
a. True
b. False
False
Balance of Payments
Summary of transactions between domestic and foreign residents, rather than between domestic residents, for a specific country over a specified period of time.
Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that affect the transfer of control.
a. True
b. False
False
• Portfolio investment
Transactions involving long term financial assets (such as stocks and bonds) between countries
But the control does not transfer.
A balance of trade deficit indicates an excess of imports over exports.
a. True
b. False
True
The capital account reflects changes in country ownership of long-term (but not short-term) assets.
a. True
b. False
False
• Capital Account: summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time.
An increase in the U.S. inflation rate relative to Japan would increase the U.S. current account balance, as foreign importers would find U.S. goods more attractive (cheaper) than their own products.
a. True
b. False
F
the inflation rate increase that increases the import. The foreign importer would find goods more expensive
An expected strengthening of a country’s home currency will attract more capital from foreign investors and thus improve the country’s capital account balance.
a. True
b. False
T
The great expectation would attract more investor to invest that in turn increase the capital account
In order to use the IMF’s compensatory financing facility (CFF), a country must show that its financial problems are temporary and must be willing to work with the IMF in resolving the problem.
a. True
b. False
T
Its compensatory financing facility (CFF) attempts to reduce the impact of export instability on countries.
A special drawing right (SDR) is an actual currency used by Germany, France, Japan, and Britain to counteract the instability in these currencies.
a. True
b. False
F
Financing is measured in special drawing rights (SDRs)
The SDR serves as the unit of account of the IMF and some other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.
The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.
a. True
b. False
T
Funds are distributed through cofinancing agreements:
• Official aid agencies
• Export credit agencies
• Commercial banks
The capital account includes the value of financial assets transferred across country borders by people who move to a different country.
a. True
b. False
T
• Includes the value of financial assets transferred across country borders by people who move to a different country.
A summary of transactions between domestic and foreign residents for a specific country over a specified period of time is the
a. Balance on goods and services. b. Current account. c. Capital account. d. Balance of payments. e. Balance of trade.
d. Balance of payments.
Summary of transactions between domestic and foreign residents for a specific country over a specified period of time
The ________ is the difference between exports and imports.
a. Current account b. Capital account c. Balance of trade d. Balance on goods and services e. Balance of payments
c. Balance of trade
The difference between total exports and imports is referred to as the balance of trade.
________ represent(s) income received by investors on foreign investments in financial assets (securities).
a. Direct foreign income b. Factor Income c. Portfolio income d. Unilateral transfers e. None of these choices are correct.
b. Factor Income
Factor income is the flow of income that is derived from the factors of production—the general inputs required to produce goods and services. Factor income on the use of land is called rent, income generated from labor is called wages, and income generated from capital is called profit.
- Primary Income Payments
- Represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities).
Included in the capital account are
a. Long-term direct foreign investment. b. Long-term financial assets only. c. Short-term financial assets only. d. Long-term and short-term direct foreign investment and trading of securities. e. Short-term direct foreign investment.
Long-term and short-term direct foreign investment and trading of securities
Capital Account
• Originally included the financial account.
• Includes the value of financial assets transferred across country borders by people who move to a different country.
• Includes patents and trademarks.
• Relatively minor (in terms of dollar amounts) to financial account.
The current account balance is not directly affected by
a. Inflation. b. National income. c. Interest rates. d. Exchange rate movements. e. Government restrictions.
interest rate
interest rate affects Portfolio Investment
Which of the following factors does probably not directly affect a country’s capital account and its components?
a. Exchange rate movements b. Interest rates c. Withholding taxes on foreign income d. Inflation e. All of these choices will directly affect a country's capital account.
d. Inflation
inflation affects the international trade flow
Inflation: Higher prices decreases exports and increases imports. Thus Current account (which is essentially ExportsImports) decreases if inflation increases relative to trade partners.
Which of the following statements is not true?
a. Exporters may complain that they are being mistreated because the currency of their country is too weak. b. Sometimes, trade policies are used to punish countries for various actions. c. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries. d. Outsourcing affects the balance of trade because it means that a service is purchased in another country. e. All of these choices are true.
Exporters may complain that they are being mistreated because the currency of their country is too weak.
Correct: importer may complain that they are being mistreated because the currency of their country is too weak
________ represent aid, grants, and gifts from one country to another.
a. The capital account b. Factor income c. Transfer payments d. The balance of payments e. The balance of trade
c. Transfer payments
it is also called secondary income
- Secondary Income
- Represents aid, grants, and gifts from one country to another
Which of the following is not a goal of the International Monetary Fund (IMF)?
a. To promote stability in exchange rates b. To promote free mobility of capital funds across countries c. To promote free trade d. To promote cooperation among countries on international monetary issues e. To enhance a country's long-term economic growth via the extension of structural adjustment loans
e. To enhance a country’s long-term economic growth via the extension of structural adjustment loans
- Major Objectives
- promote cooperation among countries on international monetary issues,
- promote stability in exchange rates,
- provide temporary funds to member countries attempting to correct imbalances of international payments,
- promote free mobility of capital funds across countries,
- promote free trade. It is clear from these objectives that the IMF’s goals encourage increased internationalization of business.
A special drawing right (SDR) is a unit of account established by
a. MNCs. b. The Federal Reserve. c. The IMF. d. The Bank of England. e. The Asian governments.
c. The IMF.
fact
Like the International Monetary Fund (IMF), the ________ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.
a. World Bank b. International Development Association (IDA) c. Bank for International Settlements (BIS) d. International Financial Corporation (IFC) e. World Trade Organization (WTO)
International Financial Corporation (IFC)
International Finance Corporation (IFC)
• Major Objective — promote private enterprise within
countries.
• Provides loans to corporations and purchases stock
• It traditionally has obtained financing from the World Bank but can borrow in the international financial markets.
According to the “J curve effect,” a weakening of the U.S. dollar relative to its trading partners’ currencies would result in an initial ________ in the current account balance, followed by a subsequent ________ in the current account balance.
a. Increase; increase b. Decrease; decrease c. Increase; decrease d. Decrease; increase
d. Decrease; increase
Because the value of import initially decreases as the currency weaken.
The World Bank’s Multilateral Investment Guarantee Agency (MIGA)
a. Offers various forms of political risk insurance. b. Provides loans to developing countries. c. Offers various forms of import insurance. d. Offers various forms of exchange rate risk insurance. e. Offers various forms of export insurance.
offers various forms of political risk insurance
The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank Group. Our mandate is to promote cross-border investment in developing countries by providing guarantees (political risk insurance and credit enhancement) to investors and lenders.
Also known as the “central banks’ central bank,” the ________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.
a. International Development Association (IDA) b. International Financial Corporation (IFC) c. World Bank d. World Trade Organization e. Bank for International Settlements (BIS)
e. Bank for International Settlements (BIS)
Bank for International Settlements (BIS)
• Major Objectives — facilitate cooperation among countries with regard to international transactions.
• Provides assistance to countries experiencing a financial crisis.
• Sometimes referred to as the “central banks’ central
bank” or the “lender of last resort.”
Which of the following would not result in a current account deficit?
a. High inflation b. Low national income c. Low or no restrictions on imports d. A strong local currency e. A strong demand for imports and a weak foreign demand for exports
b. Low national income
Low national income would increase export
High inflation would increase imports
low or no restrictions on imports would increase imports
A strong local currency would increase import
A strong demand for imports and a weak foreign demand for exports would increase import
chapter 2 quiz A low home inflation rate relative to other countries would \_\_\_\_ the home country's current account balance, other things being equal. Low growth in the home income level relative to other countries would \_\_\_\_ the home country's current account balance, other things being equal. a. decrease; increase b. decrease; decrease c. increase; decrease d. increase; increase
D
inflation: 物价
income: 购买能力
If a country’s government removes a tariff on imported goods, that country’s current account balance will likely ____ (assuming no other changes in tariffs by other governments).
a. increase b. decrease c. remain unaffected d. be fixed at zero
b. decrease
对于进口产品减少关税，将增加进口数量，经常账户减少
A large reduction in the current account deficit will place ____ pressure on the home currency value, other things being equal.
a. upward b. downward c. no d. upward or downward (depending on the size of the deficit)
a. upward
赤字减少，说明进口相对出口减少，外币需求也在减少（，因为进口需要换外币来购买外国产品），那么国内货币将有升值趋势
If the home currency begins to depreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same).
a. increase b. have no impact on c. reduce d. all of the above are equally possible
a. increase
When a home currency depreciates, this country’s product would relatively cheaper for foreign that in turn export increase.
Which of the following would likely have the least direct influence on a country’s current account?
a. tariffs b. executive salaries c. inflation d. exchange rates
b. executive salaries
executive salaries cannot represent the national income
A reduction in the use of quotas is expected to
a. reduce the volume of a country's trade with other countries. b. reduce the country's current account balance, if other governments do not change their position. c. have no impact on the country's current account balance unless other governments retaliate. d. increase the country's current account balance, if other governments do not change their position.
b. reduce the country’s current account balance, if other governments do not change their position
减少配额限制后，将增加进口
The United States typically has a balance-of-trade deficit in its trade with ____.
a. China b. Japan c. A and B d. none of the above
c. A and B
The demand for U.S. exports tends to decrease when
a. economic growth in foreign countries increases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above
c. U.S. inflation rises.
inflation 是直接原因
Which of the following statements is not true?
a. Exporters commonly complain that they are being mistreated because the currency of their country is too strong. b. Outsourcing means that an MNC has initiated the exporting of its products. c. Sometimes, trade policies are used to punish countries for various actions. d. All of the above are true.
Outsourcing means that an MNC has initiated the exporting of its products
A 无从考察，B错的
Country Y is Country X’s sole trading partner. Which of the following would increase the current account of Country X?
a. The currency of Country Y depreciates against the currency of Country X. b. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on imports from Country X. c. The central banks of Country X and Country Y reduce the money supply to increase interest rates. d. The currency of Country X depreciates against the currency of Country Y.
The currency of Country X depreciates against the currency of Country Y.
chapter 3
In 1914, when World War I began, the gold standard was implemented; it lasted until 1944, when exchange rates were fixed under the Bretton Woods Agreement.
a. True
b. False
F
• Gold Standard (1876 - 1913)
Each currency was convertible into gold at a specified
rate. When World War I began in 1914, the gold
standard was suspended.
Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.
a. True
b. False
T
An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.
a. True
b. False
F
This is a forward contract.
A forward contract is an agreement between a firm and a bank to exchange currencies at a specified rate (the forward rate) in a specified number of days.
a. True
b. False
T
• Forward Contracts: agreements between a foreign exchange dealer and an MNC that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur.
An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures contracts.
a. True
b. False
T
以future rate or forward rate 卖出一个资产， 可以达到对冲风险
A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.
a. True
b. False
F
put option 提供了卖的权利，而不是买
The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.
a. True
b. False
T
Money market rates vary due to differences in the
interaction of the total supply of short-term funds available (bank deposits) in a specific country versus the total demand for short-term funds by borrowers in that country.
An American Depository Receipt (ADR) is a drawing right, and it is available only for U.S. stocks.
a. True
b. False
F
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares—often one share—of a foreign company’s stock.
With an ECN, investors can place orders on their computers that are then executed by the computer system and confirmed through the Internet to the investor.
a. True
b. False
T
Electronic Communication Network
An electronic communication network (ECN) is a computerized system that automatically matches buy and sell orders for securities in the market. It connects major brokerages and individual traders so they can trade directly between themselves without going through a middleman and make it possible for investors in different geographic locations to quickly and easily trade with each other. The U.S. Securities and Exchange Commission (SEC) requires ECNs to register as broker-dealers.
Typically, a given stock will appear undervalued to investors from all countries at the same time.
a. True
b. False
F
不合逻辑
The market in which the immediate exchange of currencies takes place is known as the ________ market.
a. Eurocurrency b. Spot c. Futures d. Forward e. Eurocredit
b. Spot
The market in which financial intermediaries transfer short-term funds from surplus units to deficit units is known as the ________ market.
a. Spot b. International credit c. Futures d. International money e. Forward
d. International money
The international money market has grown because
firms:
• May need to borrow funds to pay for imports denominated in a foreign currency.
• May choose to borrow in a currency in which the
interest rate is lower.
• May choose to borrow in a currency that is expected to
depreciate against their home currency
The average daily foreign exchange trading by banks around the world is closest to $________.
a. 1.5 trillion b. 1 trillion c. 700 billion d. 600 billion e. 1.3 trillion
a. 1.5 trillion
The average daily foreign exchange trading by banks around the world is closest to 1.5 trillion
Which of the following is not a possible bid/ask quotation for the Barbados dollar?
a. $.52/$.51 b. $.51/$.52 c. $.50/$.51 d. $.49/$.50 e. All of these choices are possible bid/ask quotations.
a. $.52/$.51
bid price should small than ask price
Assume a bank’s bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars.
How many dollars will you have left after the two conversions?
a. $998 b. $989.45 c. $1,000 d. $500 e. $998.37
b. $989.45
bid price: $0.187/DKK
ask price: $0.1895/DKK
you have $1000
$–>DKK–>$
$1000/ask price = DKK
DKK*bid price = $
Assume a bank’s bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars.
How many Danish kroner will you receive when converting the dollars initially?
a. 5,333.33 b. 5,000 c. 189.50 d. 5,277.04 e. 187.50
d. 5,277.04
bid price: $0.187/DKK
ask price: $0.1895/DKK
you have $1000
$–>DKK–>$
$1000/ask price = DKK
Assume a bank’s bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars.
What is the bank’s bid/ask percentage spread?
a. 1% b. 1.07% c. 0% d. 1.06% e. 2%
b. 1.06%
spread = (ask price - bid price)/ask prie
Which of the following is probably not an example of the use of forward contracts by an MNC?
a. Hedging yen payables by purchasing yen forward b. Hedging peso payables by purchasing pesos forward c. Hedging peso receivables by selling pesos forward d. Hedging pound payables by selling pounds forward e. All of these choices are examples of using forward contracts.
Hedging pound payables by selling pounds forward
A quotation representing the value of a foreign currency in dollars is referred to as a(n) ________ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ________ quotation.
a. Indirect; direct b. Indirect; indirect c. Direct; direct d. Direct; indirect e. Cannot be answered without more information
d. Direct; indirect
- Direct versus indirect quotations at one point in time
- Direct Quotation represents the value of a foreign currency in dollars (number of dollars per currency
• Indirect quotation represents the number of units of a
foreign currency per dollar.
A bond sold in countries other than the country represented by the currency denominating it is known as a:
a. Parallel bond. b. Floating rate note. c. Foreign bond. d. Eurobond. e. Eurocredit loan.
d. Eurobond.
Eurobonds
• Denominations of Eurobonds
• Commonly denominated in a number of currencies
Which of the following is not a reason why an MNC may decide to issue stock in a foreign country?
a. The market in which the stock is to be issued is highly liquid. b. The market in which the stock is to be issued is very large, contributing to the market's liquidity. c. Regulations in the market in which the stock is to be issued are more stringent than regulations in the home market. d. The MNC wishes to establish a global image. e. All of these choices are reasons why an MNC may decide to issue stock in a foreign country.
c. Regulations in the market in which the stock is to be issued are more stringent than regulations in the home market.
A share of the ADR of the German firm Bergerschnus represents one share of this firm’s stock that is traded on the Frankfurt Stock Exchange. The share price of Bergerschnus was 30 euros when the Frankfurt exchange closed. When the U.S. market opens, the euro is worth $1.15.
The price of the ADR should be:
a. $30.00. b. $31.15. c. $26.09. d. $34.50. e. None of these choices are correct.
d. $34.50.
The share price of Bergerschnus x the euro is worth
A share of the ADR of the German firm Bergerschnus represents one share of this firm’s stock that is traded on the Frankfurt Stock Exchange. The share price of Bergerschnus was 30 euros when the Frankfurt exchange closed. When the U.S. market opens, the euro is worth $1.15.
If the Bergerschnus ADR is convertible into three shares of stock, the ADR price would be:
a. $103.50. b. $34.50. c. $78.27. d. $93.45. e. None of these choices are correct.
a. $103.50.
3 x The share price of Bergerschnus x the euro is worth
An MNC’s long-term financing decisions are satisfied in the ________ market and the ________.
a. International money; international bond b. International credit; international money c. International bond; international stock d. International money; international credit e. International bond; international credit
c. International bond; international stock
A year ago, Peter Allan invested in the stock of Jober, a German company. Over the last year, the stock declined in value by 20 percent. However, the euro appreciated over the year by 10 percent. If Peter sold the stock today, his return would be ________.
a. 30 percent b. 32 percent c. -10 percent d. -12 percent e. None of these choices are correct
d. -12 percent
德国公司用的是欧元做本币
Which of the following does not directly affect the bid/ask spread?
a. bank profits b. inventory costs c. order costs d. volume
a. bank profits
- Factors That Affect the Spread
- Order costs: Costs of processing orders, including clearing costs and the costs of recording transactions.
- Inventory costs: Costs of maintaining an inventory of a particular currency.
- Competition: The more intense the competition, the smaller the spread quoted by intermediaries.
- Volume: Currencies that have a large trading volume are more liquid because there are numerous buyers and sellers at any given time.
- Currency risk: Economic or political conditions that cause the demand for and supply of the currency to change abruptly.
If a U.S. firm needs 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could
a. purchase euros 90 days from now at the spot rate. b. purchase a 90-day forward contract on euros. c. sell a 90-day forward contract on euros. d. sell euros 90 days from now at the spot rate.
b. purchase a 90-day forward contract on euros.
买远期
Assume the Canadian dollar is equal to $.90 and the Argentine peso is equal to $.30. The value of the Canadian dollars is _____ Argentine pesos.
a. 0.3 b. 0.25 c. 3 d. 2
c. 3
____ is not a bank characteristic important to customers in need of foreign exchange.
a. Quote competitiveness b. Advice about current market conditions c. Forecasting advice d. Size of loan department
d. Size of loan department
要的是换外汇，不是要借钱
The main focus of the Basel Accord is requiring banks to
a. reduce executive salaries lending. b. regulate themselves. c. increase deposits. d. hold more capital if they take more risk
d. hold more capital if they take more risk.
• Basel Accord — Banks must maintain a high level of
capital as a percent of their assets. For this purpose,
banks’ assets are weighted by risk.
The international money market primarily concentrates on
a. long-term lending. b. short-term deposits and loans. c. placing newly issued stock in foreign markets. d. medium-term lending.
b. short-term deposits and loans.
- International Money Market Securities are debt securities issued by MNCs and government agencies with a short-term maturity (1 year or less).
- Normally, these securities are perceived to be very safe from the risk of default.
- Even if the international money market securities are not exposed to credit risk, they are exposed to exchange rate risk when the currency denominating the securities differs from the home currency of the investors.
LIBOR is
a. the maximum deposit rate ceiling on deposits in the international money market. b. the maximum loan rate ceiling on loans in the international money market. c. the average inflation rate in European countries. d. the interest rate commonly charged for loans between banks.
d. the interest rate commonly charged for loans between banks.
伦敦银行同业拆息，或称伦敦同业拆放利率，是一个英国银行同业之间的短期资金借贷款的成本，原来由英国银行家协会按其选定的一批银行，于伦敦货币市场报出的银行同业拆借利率，计算出平均指标利率。此指针利率，每个银行营业日都可能不同
As a result of the Bretton Woods Agreement, the exchange rate between any two currencies was typically
a. floating in accordance with the interest rate differential between countries. b. fixed within narrow boundaries c. freely floating, and not subject to central bank intervention. d. floating, but subject to central bank intervention
b. fixed within narrow boundaries
Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar.
In general, stock markets allow for more governance and attract more investors when they have all of the following except
a. more legal protection for shareholders. b. voting rights for shareholders c. more flexible accounting laws when reporting corporate income. d. more enforcement of the laws.
c. more flexible accounting laws when reporting corporate income.
与会计法无关
An obligation to sell a specific amount of currency at a specific exchange rate at a future point in time is called a
a. spot contract b. forward contract c. put option d. call option
b. forward contract
chapter 5 assignment
Many MNCs use forward contracts.
SL a. True
b. False
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
SL a. True
b. False
Since futures contracts are standardized, an MNC using futures contracts to hedge foreign payable or receivable positions may not be able to hedge the amount of the payable or receivable perfectly.
SL a. True
b. False
To hedge payables in a foreign currency, corporations would sell futures contracts; to hedge receivables in a foreign currency, corporations would buy futures contracts.
a. True
SL b. False
When the current exchange rate equals the exercise price, both a call and a put option with that exercise price will be at the money.
SL a. True
b. False
The break-even point for a put option buyer occurs when the revenue from selling the currency in the spot market is equal to the exercise price and the premium paid.
a. True
SL b. False
Break even if the revenue from selling the currency equals the payments made for the currency plus the option premium.
A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
a. True
SL b. False
If the underlying currency depreciates substantially, the straddle writer has to buy the currency for the strike price, since the call option will be exercised.
SL a. True
b. False
Straddle — Uses both a put option and a call option at
the same exercise price.
A strangle can be constructed in a variety of ways.
SL a. True
b. False
A strangle is a popular options strategy that involves holding both a call and a put on the same underlying asset. A strangle covers investors who think an asset will move dramatically but are unsure of the direction.
Using currency derivatives for speculation is not consistent with the general operations of an MNC.
SL a. True
b. False
使用货币衍生工具进行投机活动与跨国公司的一般运作不符。
Trebble, Inc. is a U.S.-based MNC that will need 2 million euros in 90 days to purchase European imports. Therefore, Trebble purchases a forward contract at a forward rate of $1.05. If the spot rate of the euro in 90 days is $1.00, Trebble will pay $________ for the euros and ________ incur an opportunity cost.
SL a. 2,100,000; does
b. 2,000,000; does not c. 2,100,000; does not d. 2,000,000; does e. None of these choices are correct.
Since TrebbLE inc has entered into aforward contract it has to exceute it at higher forward rate even though the spot rate has fallen ,
So Trebble inc would have to pay = 2,000,000 * 1.05 = 2,100,000
Since 90day spot rate is 100 if they had not entered in forward contract they would have not have lost 100,000 extra which is the opportunity cost.
So there was a loss in opportunity
If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $________.
SL a. 1.46
b. 1.50 c. 1.47 d. 1.55 e. None of these choices are correct.
When the futures price is below the forward rate, astute investors may attempt to simultaneously ________ a currency forward and ________ futures in that currency.
a. Buy; buy b. Buy; sell c. Sell; sell SL d. Sell; buy
When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ________ the foreign currency, invest it in the foreign country, and ________ futures in the foreign currency.
a. Sell; sell b. Sell; buy c. Buy; buy SL d. Buy; sell
Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $________ on the delivery date.
SL a. 100,000
b. 87,062.50
c. 48,000
d. 39,062.50
When the existing spot rate exceeds the exercise price, a call option is ________, and a put option is ________.
a. Out of the money; out of the money SL b. In the money; out of the money c. In the money; in the money d. Out of the money; in the money
A U.S.-based MNC knows that it will receive 125,000 Singapore dollars (S$) in 30 days from a customer that has proven to be creditworthy in the past. Both futures contracts and appropriate options with maturity dates in 30 days are available. Under this scenario, what would be the best way for the MNC to hedge its position against fluctuations in the Singapore dollar’s value?
SL a. Sell S$ futures
b. Buy S$ futures c. Sell a put option d. Buy a put option
Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $0.02. If the spot rate at the option’s maturity turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?
SL a. -$0.01
b. -$0.04 c. -$0.03 d. $0.04 e. $0.01
Which of the following is not true regarding options?
a. The buyer of a call option has the right to buy the currency at the strike price. b. The buyer of a put option has the right to sell the currency at the strike price. SL c. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised. d. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.
Put and call options are available on euros (€) with the following information:
Call option premium on euro = $.02 per unit
Put option premium on euro = $.015 per unit
Call option strike price = $1.12
Put option strike price = $1.10
One option contract represents €62,500.
Peter Porter constructs a long strangle using euros. What are the two break-even points for this position?
Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
- 065 = 1.10 - 0.02 - 0.015
- 155 = 1.12 + 0.02 + 0.015
$1.065 and $1.155
The maximum loss for the long strangle position is $________ per unit. The maximum loss occurs at future spot prices ________.
0.035; between the two exercise prices
Put and call options are available on Canadian dollars (C$) with the following information:
Call option premium on Canadian dollar = $.03 per unit
Put option premium on Canadian dollar = $.02 per unit
Call option strike price = $0.77
Put option strike price = $0.77
One option contract represents C$50,000.
If you construct a short straddle position, what are the two break-even points for this position?
a. $0.75 and $0.79 b. $0.74 and $0.82 SL c. $0.72 and $0.82 d. $0.75 and $0.80 e. $0.74 and $0.80
- 72 = 0.77 - 0.05
- 82 = 0.77+ 0.05
If the spot price of the Canadian dollar at option expiration is $0.80, the profit or loss from the short straddle position is a $________ per unit. Assume that you do not own any previously purchased Canadian dollars.
SL a. 0.02 profit
b. 0.05 profit c. 0.02 loss d. 0.05 loss e. 0.03 profit
The one-year forward rate of the British pound is quoted at $1.50, and the spot rate of the British pound is quoted at $1.515. The forward \_\_\_\_ is \_\_\_\_ percent. a. discount; 1.5 SL b. discount; 1.0 c. premium; 1.0 d. premium; 1.5
Forward contracts contain
SL a. a commitment to the owner, and can be tailored to the owner’s desire.
对所有者的承诺，可以根据所有者的需求进行调整
b. a commitment to the owner, and are standardized.
c. a right but not a commitment to the owner, and are standardized.
d. a right but not a commitment to the owner, and can be tailored to the owner’s desire.
Which of the following is the least likely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a. Purchase a call option on francs.
SL b. Sell a futures contract on francs.
c. Obtain a forward contract to purchase francs forward.
d. All of the above are appropriate strategies for the scenario described.
If your firm expects the euro to substantially appreciate, it could speculate by \_\_\_\_ euro call options or \_\_\_\_ euros forward in the forward exchange market. a. purchasing; selling SL b. purchasing; purchasing c. selling; selling d. selling; purchasing
When you own ____, there is an obligation on your part; however, when you own ____, there is no obligation on your part.
a. call options; put options
b. forward contracts; futures contracts
c. futures contracts; call options
SL d. call options; forward contracts
The lower the variability of a currency, the \_\_\_\_ will be the premium of a call option on this currency, and the \_\_\_\_ will be the premium of a put option on this currency, other things being equal. a. greater; lower SL b. lower; lower c. greater; greater d. lower; greater
The longer the time to the expiration date for a currency, the \_\_\_\_ will be the premium of a call option, and the \_\_\_\_ will be the premium of a put option, other things being equal. a. lower; greater b. lower; lower SL c. greater; greater d. greater; lower
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. selling an identical futures contract.
SL b. buying 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.
The premium on a pound put option is $.04 per unit. The exercise price is $1.60. The break-even point is \_\_\_\_ for the buyer of the put, and \_\_\_\_ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.56; $1.60 SL b. $1.56; $1.56 c. $1.64; $1.56 d. $1.64; $1.64
When a currency call option is classified as “in the money,” this indicates that
a. the spot rate of the currency is less than the exercise price of the option.
b. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
c. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.
SL d. the spot rate of the currency is greater than the exercise price of the option.
Chater 4
Exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government.
SL a. True
b. False
Exchange rate systems can be classified according to the degree of government control and fall into the following categories: • Fixed • Freely floating • Managed float • Pegged
An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
a. True
b. False
- Advantages of fixed exchange rates
- Insulate country from risk of currency appreciation.
- Allow firms to engage in direct foreign investment without currency risk.
- Disadvantages of fixed exchange rates
- Risk that government will alter value of currency.
- Country and MNC may be more vulnerable to economic conditions in other countries
lack of chapter 4 quiz and assignment
Chapter 6
assignment
Exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government.
SL a. True
b. False
An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
SL a. True
b. False
lack of assignment and quiz chapter 6
chapter 7
assignment
Arbitrage can be defined as capitalizing on a discrepancy in quoted prices that does not involve risk but involves an investment of funds.
a. True
SL b. False
If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.
a. True
SL b. False
Locational Arbitrage
• Defined as the process of buying a currency at the location where it is priced cheap and immediately selling it at another location where it is priced higher.
For locational arbitrage to be possible, one bank’s ask rate must be higher than another bank’s bid rate for a currency.
a. True
SL b. False
ask rate (银行卖价，客户买) < bid rate (银行买价，客户卖)
To obtain the value of Currency Y in units of Currency Z, you would divide the value of Currency Y in dollars by the value of Currency Z in dollars.
SL a. True
b. False
Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
a. True
SL b. False
Covered interest arbitrage involves capitalizing on exchange rates between locations.
a. True
SL b. False
If interest rate parity exists, then the rate of return achieved from covered interest arbitrage should be equal to the interest rate available in the foreign country.
a. True
SL b. False
The interest rate in South Africa is 8%. The interest rate in the U.S. is 5%. The South African forward rate should exhibit a premium of about 3%.
a. True
SL b. False
？？？？？
Even if covered interest arbitrage appears feasible after accounting for transaction costs, the act of investing funds overseas is subject to political risk.
SL a. True
b. False
Because of interest rate parity, a foreign currency’s forward rate will normally not move in tandem with the spot rate.
a. True
SL b. False
？？？？？？？
Arbitrage involves
SL a. Capitalizing on a discrepancy in quoted prices.
b. An investment of funds tied up for a length of time. c. Risk. d. All of these choices are correct.
Which of the following is not mentioned in the text as a form of international arbitrage?
a. Triangular arbitrage b. Covered interest arbitrage c. Locational arbitrage SL d. Transactional arbitrage e. All of these choices are mentioned in the text as forms of international arbitrage.
Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?
SL a. $1,639
b. $2,041,667 c. $500 d. $9,804
Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs’ actions, the following adjustments must take place.
a. One bank's ask price will rise and the other bank's bid price will fall. SL b. [One bank's ask price will rise and the other bank's bid price will fall.] and [One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall.] c. One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall. d. One bank's ask price will fall and the other bank's bid price will rise.
Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?
a. $6,090.13 SL b. $5,030.45 c. Triangular arbitrage is not possible in this case. d. $6,053.27
Question 16
calculation
Which of the following is not true regarding covered interest arbitrage?
a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. SL b. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. c. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. d. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. e. All of these choices are true regarding covered interest arbitrage
question 18 calculation
question 19 calculation
question 20 calculation
question 21
Which of the following formulas is not an exact or approximate representation of interest rate parity (IRP)?
p = (1+if)/(1+ik) -1
Which of the following is not true regarding interest rate parity (IRP)?
a. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount. SL b. When covered interest arbitrage is not feasible, interest rate parity must hold. c. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium. d. When interest rate parity holds, covered interest arbitrage is not possible. e. All of these choices are true.
question 24
question 25
If interest rate parity does not hold, covered interest arbitrage may be possible. Before deciding whether to conduct covered interest arbitrage, which of the following factors does not need to be investigated?
a. Taxes b. Political risk c. Transaction costs d. Currency restrictions SL e. All of these choices should be considered
quiz Due to \_\_\_\_, market forces should realign the spot rate of a currency among banks. SL a. locational arbitrage b. triangular arbitrage c. covered interest arbitrage d. quadratic arbitrage
Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X
a. should exhibit a discount.
SL b. should exhibit a premium.
c. should be zero
d. the information provided is not sufficient to select any answer.
Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity?
a. upward pressure on the U.S. interest rate
SL b. downward pressure on the yen’s spot rate
c. downward pressure on the yen’s interest rate
d. downward pressure on the yen’s forward rate
If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur?
a. Spot rate of peso increases; forward rate of peso increases.
b. Spot rate of peso decreases; forward rate of peso decreases.
c. Spot rate of peso decreases; forward rate of peso increases.
SL d. Spot rate of peso increases; forward rate of peso decreases.
Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month.
a. discount; discount changed to a premium
SL b. discount; the size of the discount increased
c. premium; the size of the premium increased
d. premium; changed to a discount
Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should \_\_\_\_, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should \_\_\_\_. a. remain stable; appreciate b. appreciate; depreciate c. depreciate; depreciate SL d. appreciate; appreciate e. depreciate; appreciate
Assume that the Swiss interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?
SL a. Swiss investors who attempt covered interest arbitrage earn a higher return than American investors who attempt covered interest arbitrage.
b. Americans using covered interest arbitrage earn the same rate of return as Swiss investors who attempt covered interest arbitrage.
c. Americans who invest in the United States earn the same rate of return as Swiss investors who attempt covered interest arbitrage.
d. Americans who invest in the United States earn the same rate of return as Swiss investors who invest in Switzerland.
According to interest rate parity (IRP)
a. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.
c. the forward rate differs from the spot rate by a sufficient amount to offset the inflation rate differential between two currencies.
SL d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve
a. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. b. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. c. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. d. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. e. Locational arbitrage is not possible in this case.
question 10 calculation
chapter 8
Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.
a. True
SL b. False
The absolute form of purchasing power parity (PPP) states that the rate of change in the prices of products should be similar (but not identical) when measured in a common currency.
a. True
SL b. False
The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
SL a. True
b. False
PPP theory cannot be tested for countries on which inflation information is available.
a. True
SL b. False
Research in finance indicates that when an exchange rate deviates far from the value that would have been expected according to purchasing power parity (PPP), it moves towards that value.
SL a. True
b. False
Assume that a regression of exchange rate changes on the expected exchange rate changes according to purchasing power parity (PPP) produced a coefficient of 2. This strongly indicates that PPP holds.
a. True
SL b. False
A theory relating exchange rate changes to the nominal interest rate differential between two countries is the international Fisher effect (IFE).
SL a. True
b. False
The Fisher effect states that real risk-free interest rates contain a nominal rate of return and anticipated inflation.
a. True
SL b. False
Assume a statistical test is run, where actual exchange rate changes are regressed on the hypothesized exchange rate changes according to the IFE. The hypothesized values of the intercept and coefficient are 0.0 and 1.0, respectively.
SL a. True
b. False
Which of the following is true regarding purchasing power parity (PPP)?
a. The absolute form of PPP suggests that prices of similar products of two different countries should be equal when measured in a common currency. b. PPP focuses on the exchange rate-inflation relationship. c. The relative form of PPP accounts for the possibility of market imperfections. SL d. All of these choices are true regarding PPP.
Which of the following is not an exact or approximate mathematical representation of PPP?
(1+ih)/(1+if)-1
Which of the following is not an exact or approximate mathematical representation of the international Fisher effect (IFE)?
(1+Ih)/(1+If)-1
The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be
a. $0.00492. b. $0.0078. SL c. $0.0082. d. $0.0111. e. None of these choices are correct.
Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ________ their imports from New Zealand and New Zealand consumers to ________ their imports from the U.S. According to purchasing power parity (PPP), this will results in a(n) ________ of the New Zealand dollar (NZ$).
a. Increase; reduce; depreciation SL b. Reduce; increase; depreciation c. Reduce; increase; appreciation d. Increase; reduce; appreciation
The dashed line is the PPP line. Which of the following is not true (assume that there are no market imperfections)?
a. Any point lying on the PPP line represent purchasing power parity. SL b. Any point lying to the left of the PPP line represent covered interest arbitrage opportunities for home country investors. c. Any point lying to the left of the PPP line represent higher home consumers' purchasing power with respect to foreign goods than home goods. d. Any point lying to the right of the PPP line represent cheaper foreign goods than home country goods from a foreign consumer's perspective.
The following regression was conducted for the exchange rate of the Cyprus pound (CYP):
Regression results indicate that α = 0 and α = 2. Therefore,
a. Purchasing power parity holds. b. Purchasing power parity will overestimate the exchange rate change of the Cyprus pound in the future. c. Purchasing power parity overestimated the exchange rate change during the period under examination. SL d. Purchasing power parity underestimated the exchange rate change during the period under examination.
Among the reasons that purchasing power parity (PPP) does not consistently occur are
a. Exchange rates are affected by national income differentials and government controls. b. Supply and demand may not adjust if no substitutable goods are available. c. Exchange rates are affected by interest rate differentials. SL d. All of these choices are reasons that PPP does not consistently occur.
According to the international Fisher effect (IFE),
SL a. [Home country investors will earn the same return on foreign investments as on domestic investments.] and [Foreign country investors will earn the same return on foreign investments than on domestic investments.]
b. Foreign country investors will earn the same return on foreign investments than on domestic investments. c. Home country investors will earn the same return on foreign investments as on domestic investments. d. [Home country investors will earn the same return on foreign investments as on domestic investments.], [Foreign country investors will earn the same return on foreign investments than on domestic investments.], and [Home country investors will earn the higher of the return on foreign country investments and home country investments.] e. Home country investors will earn the higher of the return on foreign country investments and home country investments.
If nominal Canadian interest rates are 2% and nominal U.S. interest rates are 6%, then the Canadian dollar (C$) is expected to ________ by about ________%, according to the international Fisher effect (IFE)
SL a. Appreciate; 3.92
b. Depreciate; 3.92 c. Depreciate; 4.00 d. None of these choices are correct.
Real interest rates in the U.K. are 6%, while real interest rates in the U.S. are 5%. The spot rate for the British pound (£) is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of
a. $1.49. b. $1.44. c. $1.51. SL d. The international Fisher effect suggests none of these choices are correct.
You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is
SL a. 10.16%.
b. 8.00%. c. 5.88%. d. 6.00%
The nominal interest rate in Fiji is 3%, while the nominal interest rate in the U.S. is 5%. Real interest rates in both countries are 2%. According to purchasing power parity (PPP), the Fijian dollar (F$) may be expected to ________ by ________%.
a. Depreciate; 1.94 b. Depreciate; 1.98 c. Appreciate; 1.94 SL d. Appreciate; 1.98
Which of the following is not true regarding IRP, PPP, and the IFE?
SL a. IRP suggests that a currency’s spot rate will change according to interest rate differentials.
b. The IFE suggests that a currency's spot rate will change according to interest rate differentials. c. PPP suggests that a currency's spot rate will change according to inflation differentials. d. All of these choices are true.
The following is a graphical representation of the IFE line:
The dashed line is the IFE line. Which of the following is not true (assume that there are no market imperfections)?
a. Any point lying on the IFE indicates that the international Fisher effect holds. b. Any point lying to the right of the PPP line indicates that returns from foreign investments will be lower than those from those available at home. SL c. [Any point lying to the left of the IFE line represents opportunities for home country investors to earn higher returns than those available domestically.] and [Any point lying to the right of the PPP line indicates that returns from foreign investments will be lower than those from those available at home.] are not true. d. All of these choices are true. e. Any point lying to the left of the IFE line represents opportunities for home country investors to earn higher returns than those available domestically.
quiz
According to the IFE, if British interest rates are lower than U.S. interest rates
a. the British inflation rate will decrease.
b. the British pound’s value will remain constant.
c. the British pound will depreciate against the dollar.
d. today’s forward rate of the British pound will equal today’s spot rate.
SL e. the British pound will appreciate against the dollar.
If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold
SL a. the value of the euro would often depreciate against the dollar.
b. the value of the euro would often appreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and SL a. the inflation differential. b. the forward discount or premium. c. the income differential. d. none of the above
Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina’s nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____.
a. 3 percentage points above; depreciate by about 3 percent
b. 3 percentage points below; depreciate by about 3 percent
c. 2 percentage points below; appreciate by about 2 percent
SL d. 2 percentage points above; depreciate by about 2 percent
e. 3 percentage points below; appreciate by about 3 percent
Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a \_\_\_\_\_\_\_, and the spot rate of the Canadian dollar will \_\_\_\_\_\_\_\_\_\_\_\_\_ over the next year. SL a. discount; depreciate b. discount; appreciate c. premium; depreciate d. premium; appreciate
According to ___________, a country with a higher interest rate will have higher expected inflation.
SL a. the international Fisher effect (IFE)
b. A and B
c. purchasing power parity (PPP)
d. interest rate parity (IRP)
Assume that the inflation rate in Singapore is 3 percent, while the inflation rate in the United States is 8 percent. According to PPP, the Singapore dollar should \_\_\_\_ by \_\_\_\_percent. SL a. appreciate; 4.85 b. depreciate; 3,11 c. depreciate; 4.85 d. appreciate; 3.11
The interest rate in the United Kingdom is 7 percent, while the interest rate in the United States is 5 percent. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of a. $1.53. b. $1.43. c. $1.57. SL d. $1.47.
The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:
Regression results indicate that a0 = 0 and a1 = 0.4. Therefore
SL a. purchasing power parity overestimated the exchange rate change during the period under examination.
b. purchasing power parity holds. c. purchasing power parity will overestimate the exchange rate change of the British pound in the future. d. purchasing power parity underestimated the exchange rate change during the period under examination.
Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 6 percent SL b. 4 percent c. 2 percent d. 3 percent
chapter 10
The degree to which the value of future cash transactions can be affected by exchange rate fluctuations is referred to as economic exposure.
a. True
SL b. False
Transaction exposure can have a substantial impact on a firm’s earnings; currency movements could possibly eliminate any profits from exporting.
SL a. True
b. False
While an MNC may not be able to predict a currency’s variability with perfect accuracy, it can identify currencies whose values are most likely to be stable or highly variable in the future.
SL a. True
b. False
Two highly negatively correlated currencies act almost as if they are the same currency.
a. True
SL b. False
Currency correlations are generally negative.
a. True
SL b. False
The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.
a. True
SLb. False
The degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
a. True
SL b. False
Generally speaking, transaction exposure is a part of economic exposure.
SL a. True
b. False
Two ways of measuring economic exposure are measuring the sensitivity of earnings to various exchange rate scenarios and regression analysis.
SL a. True
b. False
If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.
SL a. True
b. False
Which of the following is not a form of exposure to exchange rate fluctuations?
a. Translation exposure b. Transaction exposure c. Economic exposure SL d. Credit exposure
The ________ into the future an MNC attempts to measure transaction exposure, the ________ accurate will be the assessment.
a. Less far; more b. Farther; less c. Less far; less d. Farther; more SL e. [Farther; less] and [Less far; more]
Which of the following is not true regarding currency correlations?
a. If two inflow currencies are negatively correlated transaction exposure is somewhat offset. b. Two highly positively correlated currencies act almost as if they are the same currency. c. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset. SL d. If two inflow currencies are highly positively correlated transaction exposure is somewhat offset.
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% for pounds. The correlation coefficient of the Taiwan dollar with respect to the pound is 0.7. Based on this information, the standard deviation of this two currency portfolio is approximately
a. 4.33%. b. 2.63%. c. 5.55%. SL d. 5.13%
Fernando Co. will receive 5 million British pounds (£) tomorrow as a result of selling products to a British firm. Fernando has estimated the standard deviation of daily percentage changes of the British pound to be 1.1 percent over the last 100 days. Assume that these daily percentage changes are normally distributed. The expected daily percentage change for the British pound is 0.2 percent tomorrow.
What is the maximum one-day loss based on the value-at-risk (VAR) method? Assume a 95% confidence interval.
SL a. 1.62 percent
b. 2.02 percent c. 1.82 percent d. 1.10 percent e. None of these choices are correct.
Fernando Co. will receive 5 million British pounds (£) tomorrow as a result of selling products to a British firm. Fernando has estimated the standard deviation of daily percentage changes of the British pound to be 1.1 percent over the last 100 days. Assume that these daily percentage changes are normally distributed. The expected daily percentage change for the British pound is 0.2 percent tomorrow.
What is the dollar value of the maximum potential loss Fernando Co. could incur if the current spot rate for the pound is $1.50?
a. $136,500 SL b. $121,500 c. $151,500 d. $75,000 e. None of these choices are correct.
Which of the following is not true?
a. Economic exposure includes transaction exposure. b. Transaction exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations. c. Economic exposure is the degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations. d. Translation exposure is the exposure of an MNC's consolidated financial statements to exchange rate fluctuations. SL e. All of the these choices are true.
In general, ________ in the firm’s local currency causes a(n) ________ in both cash inflows and outflows.
a. Depreciation; increase b. Appreciation; reduction c. Appreciation; increase SL d. [Appreciation; reduction] and [Depreciation; increase] e. Depreciation; reduction
If the U.S. dollar appreciates,
a. An MNC's exports denominated in U.S. dollars will probably increase. SL b. An MNC's U.S. sales will probably decrease. c. An MNC's interest owed on foreign funds borrowed will probably increase. d. An MNC's exports denominated in foreign currencies will probably increase. e. All of these choices are correct.
Which of the following is not true regarding economic exposure?
a. Even purely domestic firms can be affected by economic exposure. b. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. c. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. SL d. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. e. All of these choices are true.
Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:
where the term on the left hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model returns a coefficient of α1 of 2. This indicates that
a. If the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. SL b. If the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. c. If the foreign currency appreciates by 1%, Mill's cash flows will decline by 0.2%. d. If the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. e. None of these choices are correct.
When using regression analysis to assess the degree of economic exposure, which of the following should never be used as a dependent variable?
a. The percentage change in the company's cash flow b. The company's exports c. The stock price d. The company's earnings AL e. All of the these choices could be used as dependent variables.
Which of the following is not true regarding translation exposure?
SL a. Translation exposure will not affect cash flows, even if earnings are remitted to the parent.
b. Since earnings can affect stock prices, many MNCs are concerned about translation exposure. c. Since translation of financial statements does not affect an MNC's cash flows, some analysts suggest that translation exposure is not relevant. d. All of these choices are true
A company may become more exposed or sensitive to an individual currency’s movements over time because
SL a. The company has increasingly used the currency to purchase goods.
b. The company has increased its hedging. c. The company has reduced its involvement in the country represented by that currency. d. All of the these choices are possible reasons for an increased sensitivity to the individual currency's movement.
Which of the following is not a reason why translation exposure may be relevant to an MNC?
a. The prevailing exchange rates affect the expected cash flows that result from the future. b. Consolidated earnings are used by many investors to value MNCs. c. MNC subsidiaries may want to remit a portion of their earnings to their respective parents now. SL d. All of the these choices are reasons why translation exposure may be relevant to an MNC.
quiz Generally, MNCs with more foreign costs than foreign revenues will be \_\_\_\_ affected by a \_\_\_\_ foreign currency. a. not; stronger b. not; weaker c. favorably; stronger SL d. favorably; weaker
If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is \_\_\_\_ if the two currencies are \_\_\_\_ correlated. a. high; positively b. low; negatively SL c. high; negatively d. none of the above
When the U.S. dollar strengthens against other currencies,
SL a. an MNC’s U.S. sales will probably decrease.
b. an MNC’s exports denominated in U.S. dollars will probably increase.
c. an MNC’s interest owed on foreign funds borrowed will probably increase.
d. an MNC’s exports denominated in foreign currencies will probably increase.
e. all of the above
Which of the following is not true regarding economic exposure?
a. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.
SL b. In general, depreciation of the firm’s local currency causes a decrease in both cash inflows and outflows.
c. Even purely domestic firms can be affected by economic exposure.
d. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.
The exposure of a firm's financial statements to exchange rate movements is referred to as a. economic exposure. SL b. translation exposure. c. transaction exposure. d. forward exposure.
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day percentage loss if the expected percentage change of the euro tomorrow is 0.5 percent? a. –0.5 percent SL b. –1.15 percent c. –1.5 percent d. –2.2 percent
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5 percent? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01. a. –$111,100 b. –$75,750 SL c. –$57,500 d. –$25,250
Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Austria. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Austrian subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05. SL a. $525,000 outflow b. $3,675,000 outflow c. $210,000 outflow d. $525,000 inflow
One argument for the irrelevance of exchange rate risk is that:
SL a. individuals can invest in a diversified set of MNCs, and can take positions in currencies on their own to offset any exchange rate exposure of MNCs.
b. MNCs can easily hedge their economic exposure.
c. MNCs are not normally subject to economic exposure.
d. MNCs are not normally subject to transaction exposure.
\_\_\_\_ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations. SL a. Transaction b. Economic c. Translation d. None of the above
