FINAL Flashcards
If you believe in the foreign exchange market is weak-form efficient, then you believe you can look at past trends and patterns to accurately predict exchange rate movements (T/F)
False
Using the PPP model, if the US inflation is expected to be 5% and the Brazilian inflation is expected to be 13%, what will the estimated USD/BRL spot rate approximately be in 1-year if today it is 5.58 BRL?
6.03
When conducting valuation analysis that requires currency conversion, it is always best to use a point estimate as opposed to a range of forecasted exchange rate values (T/F)
False
Which type of analysis relies on recognizing patterns and trends in forex data to predict exchange rates?
a. Market-Based analysis
b. Fundamental analysis
c. Technical analysis
Technical Analysis
Brazil is expected to have higher inflation rates than the US over the next five years. Based on relative economic strength, which currency would you expect to appreciate?
a. USD
b. BRL
USD
You conduct a regression analysis where the actual spot is the dependent variable and the predicted spot rate is the independent variable. Your resulting Beta coefficient is 1.5, which is statistically significant. According to your model, it would appear that your prediction method ________ predicts the exchange rate.
a. Overestimates
b. Accurately
c. Underestimates
Underestimates
〖% Δ Spot Rate〗t =0.05+ 0.5〖Inflation Diff_t- 0.4〖Income Growth Diff_t - 0.50〖GDP Growth Diff〗t
According to the regression values above, for each 1% change in ______ the spot rate is expected to appreciate by .50%
a. income
b. GDP
c. inflation
Inflation
The 5-year forward premium is 2.50% for the USD/BRL. The USD/BRL current spot rate is 5.58 BRL.
Using market-based analysis, what is the closest estimate for the USD/BRL spot rate in 5-years?
5.72
Using instantaneous factors in regression analysis will always increase the accuracy of forecasts compared to using lagged factors (T/F)
False
When conducting valuation analysis on MNC’s, all the firm’s cash flows need to be converted into the domestic currency of the company. (T/F)
True
You conduct the following regression analysis:
% Δ Spot Ratet = α+ β_1 〖Inflation Diff〗_t+ Income Difft-1 + GPD Growth Diff t + ε
All intendent variables are instantaneous. (T/F)
False
Inflation would be an example of the type of indicator used in market-based analysis. (T/F)
False
A firm expecting future receivables in foreign currency most closely classified into which financial management category?
a. short-term hedging and cash management
b. evaluating borrowing and investment opportunities
c. operating strategy
d. long-term strategic decisions
short-term hedging and cash management
If you believe that exchange rates price in all publicly known and relevant information but do not price in all private information. You believe the market is at most _______
a. strong
b. semi-strong
c. weak
semi-strong
Your predicted value for the USD/BRL was 6.04 however the actual value was 7.21. What was your absolute forecast error in percentage form?
16.23%
Predicting exchange rates allows firms to maximize returns and maximize exchange rate risk. (T/F)
False
You estimated the 1-year USD/CAD rate would be 1.15 but the actual rate was 1.17. The raw forecast error is _______, the absolute forecast error is ______, and the absolute forecast error in percentage form is ______.
-0.02; 0.02; 1.71%
A firm deciding where in the world to sell its final product most closely classifies into which financial management category?
a. Evaluating borrowing and investment opportunity
b. Operating strategy
c. Short term hedging and cash management
d. Long term strategic decisions
Operating strategy
The EUR/CHF spot rate is currently 1.07 CHF. The 1 year interest rate in the EU is 2.5% while the 1 year interest rate in Switzerland is 1.25%. Based on this information, using the PPP model, what is the estimated EUR/CHF rate in 1 year?
1.06
You estimated the following regression model for the USD/CAD: [% change in spot rate] = 0.5 - 0.2[inflation Diff] + 0.45 [Income Growth Diff]. Assume that the inflation differential is -3% and the income growth differential is 4%. What is the expected percentage change in the USD/CAD?
2.9%
Exchange rates influence MNC valuation in one way, via the conversion of cash flows into domestic currency(CF). (T/F)
False
When evaluating which forecasting model to use, MNCs should always pick the most accurate model if they want to make the most profit (T/F)
False
In a strong-form market, security prices reflect all public and private information (T/F)
True
A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the United States and Canada was -0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ___ and the interest rate differential ____
increases; decreases
Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today’s spot rate of the Canadian dollar is $0.80. The spot rate forecasted for one year ahead is:
$0.752
Using the current spot rate or forward rate as a forecast for the future spot rate would most likely be classified as one type of analysis?
a. Fundamental analysis
b. Technical analysis
c. Market-based analysis
Market-based analysis
Which of the following is not a reason to support using technical analysis to forecast exchange rates?
a. FX participants trade regardless of whether there is a change in the macroeconomic fundamentals
b. the FX market follows trends over the short-term
c. a large majority of the FX market is for hedging purposes
a large majority of the FX market is for hedging purposes
If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project.
a. favorably; adversely
b. adversely; favorably
c. adversely; adversely
d. favorably; favorably
adversely; favorably
When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary’s perspective, which variable will most likely influence the capital budgeting analysis?
a. the euro’s exchange rate
b. the german government’s tax rate
c. the US tax rate on earnings remitted to the US
d. the withholding tax rate
the german government’s tax rate
if a multinational project is assessed from the subsidiary’s perspective, withholding taxes are ignored for project assessment (T/F)
True
Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.
a. depreciates; is unaffected
b. appreciates; decreases
c. appreciates; is unaffected
d. depreciates; decreases
depreciates; decreases
When evaluating international project cash flows, which of the following factors is relevant?
a. exchange rates
b. future inflation
c. host incentives
d. exchange rates, host incentives, and inflation
exchange rates, host incentives and inflation
Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations (i.e., it will not be changing its capital structure to finance this project). The discount rate used in the capital budgeting analysis on this project will be most affected by:
a. the cost of borrowing funds in the United Kingdom.
b. the economic conditions in the United Kingdom.
c. the parent’s cost of capital.
the parent’s cost of capital
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project after four years. Baps’s cost of capital is 13 percent, and the project has the same risk as Baps’s existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):
Year 1 - NOK10,000,000
Year 2 - NOK15,000,000
Year 3 - NOK17,000,000
Year 4 - NOK20,000,000
The current exchange rate of the Norwegian kroner is $.135. Baps’s exchange rate forecasts for the Norwegian kroner over the project’s lifetime are listed below:
Year 1 - $.13
Year 2 - $.14
Year 3 - $.12
Year 4 - $.15
Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
$1,048,829
If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a ____ after the subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
strengthening euro
An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm’s cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?
a. about NZ$25 million
b. about NZ$15 million
c. about NZ$37 million
d. about NZ$31 million
e. about NZ$11 million
about NZ$25 million
A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
a. volatile
b. stable
c. fixed
volatile
If you are not sure of an assumption, you should do a sensitivity analysis (T/F)
True
In conducting a multinational capital budgeting analysis, the subsidiary’s perspective should always be used (T/F)
False
As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent’s exchange rate exposure ____
a. Increases; decreases
b. None of the above
c. Increases; increases
d. Decreases; increases
Increases; increases
If the parent’s perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent (T/F)
True
Sometimes, a multinational project may appear feasible from the subsidiary’s perspective but not from the parent’s perspective and vice versa. (T/F)
True
_____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s after-tax cash flows
a. The number of units sold by the subsidiary
b. The subsidiary’s earnings before income and taxes (EBIT)
c. The tax rate the subsidiary is subject to in the host country
d. Withholding taxes imposed by the host government
withholding taxes imposed by the host government
The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables (T/F)
True
If the parent’s government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ___ point of view
a. low; parent’s
b. high; subsidiary’s
c. high; parent’s
high; parent’s
A US based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ___ its estimate of the previously computed net present value
a. increase
b. lower
lower
If an MNC exports to a country and then esablishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ___ affected by the project. If an MNC established a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ___ affected by the project
a. Favorably; adversely
b. Adversely; favorably
c. Adversely; adversely
d. Favorable; favorably
adversely; favorably
Holding other factors constant, an international project’s NPV is ___ related to the size of the initial investment and ___ related to the project’s required rate of return
a. Negatively; positively
b. Negatively; negatively
c. Positively; positively
d. Positively; negatively
negatively; negatively
Everything else being equal, the ___ the depreciation expense is in a given year, the ___ a foreign project’s NPV will be
a. Higher; higher
b. Higher; lower
c. Lower; higher
lower; higher
The __ is (are) likely the major source of funds to start a particular project
a. Initial investment
b. Annual expenses
c. Depreciation
initial investment
Which of the following is not a Forward commitment?
a. Swap contract
b. Call contract
c. Forward contract
d. Future contract
call contract
The more volatile an exchange rate is, the lower the premium charged will be on an option. (T/F)
False
Which of the following is the most widely used derivative?
a. Swaps
b. Futures
c. Forwards
Swaps
The holder of the option pays the writer of the option a premium regardless of whether the option contract is ever exercised. (T/F)
True
You should buy a put if you expect the foreign currency to depreciate, and the foreign currency is the base currency. (T/F)
True
The holder of a call has the right to _____ the underlying asset at a specified strike/exercise price.
a. Buy
b. Sell
buy
Which of the following is not true about the purpose of derivatives
a. Make it easier to short an asset
b. Are more liquid than underlying asset
c. Allows for more effective risk management strategies
d. Trade higher transaction costs
trade higher transaction costs
The buyer or holder of a call holds more risk than the seller (writer) of the call. (T/F)
False
Which of the following is associated with a right as opposed to obligation to make the final payment
a. Forward commitment
b. Swap contract
c. Contingent claim
contingent claim
If the spot price is greater than the strike price, a call option is:
a. out of the money
b. in the money
c. at the money
in the money
One drawback of over-the-counter markets are that they are heavily regulated. (T/F)
False
If you expect the base currency to depreciate, you should ____ a future contract.
a. Buy
b. Sell
Sell
If the foreign currency is the base rate in the forward exchange rate, the investor or MNC should use the ____ rate to hedge a receivable.
a. Ask rate
b. Bid rate
Bid rate
A straddle strategy should be used with currencies that are volatile. (T/F)
True
What term is synonymous with buying a derivative contract?
a. writer
b. advisor
c. holder
d. Broker
holder
Both forwards and futures contracts have bid and ask rates. (T/F)
false
MNCs do not use call options to:
a. speculate on future exchange rate movements
b. hedge target bids for foreign M&A
c. hedge project bids in foreign currency
d. hedge receivables
hedge receivables
MNCs often sell (i.e., are the writer) of options contracts for hedging purposes. (T/F)
False
The primary purpose of forward contracts by market participants is speculation. (T/F)
False
With options, you can buy the base currency by _______
a. Buying a call or selling a call
b. Buying a call or selling a put
c. Buying a put or selling a call
d. Buying a put or selling a put
buying a call or selling a put
If you want to go short a base currency, you would ____ a futures contract.
a. Sell
b. Buy
sell
Individuals purchase call options when they want to lock in a ______ price to _____ a currency in the future.
a. minimum; buy
b. minimum; sell
c. maximum; sell
d. maximum; buy
maximum; buy
Contingent claims have non-linear payoffs. (T/F)
True
From the holder’s perspective: If the strike/exercise price is greater than the spot rate, a call is _________ and a put is _________.
a. not profitable; not profitable
b. not profitable; profitable
c. profitable; profitable
d. profitable; not profitable
not profitable; profitable
One benefit of exchange traded markets over over-the-counter markets are that they include a credit guarantee. (T/F)
True
If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ___ overall impact of the Swiss franc’s depreciation against the dollar on ___
a. Positive; gross profit
b. Negative; interest expenses
c. Positive; interest expenses
d. Negative; gross profit
positive; gross profit
Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is most likely subject to:
a. Transaction exposure
b. Economic exposure
c. Translation exposure
economic exposure
Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency (T/F)
False
Because creditors may prefer that firms maintain low exposure to exchange rate risk, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant (T/F)
True
When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ___ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____
a. Favorably; unfavorably affected
b. Unfavorably; favorably affected
c. Favorably; favorably affected by a higher degree
d. Favorably; favorably affected but by a smaller degree
unfavorably; favorably affected
According to the materials, currency volatility levels ____ perfectly stable over time, and currency correlations ___ perfectly stable over time
a. Are not; are not
b. Are not; are
c. Are; are not
d. Are; are
are not; are not
Lazer Co. is a U.S firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co has a subsidiary in South Korea that produces computers and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to
a. Translation exposure
b. All three types of exposure (translation, transaction, and economic)
c. Economic expire
d. Transaction exposure
All three types
Assume that the Japanese yen is expected to depreciate substantially over the next year. A U.S. based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of the MNC will ____ because of the yen’s depreciation.
a. Decrease
b. Remain unchanged
c. A decrease or remaining unchanged are possible
d. Increase
increase
Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ___ cycle, the firm is __ affected by its exposure
a. Strong dollar; favorably
b. Weak dollar; not
c. Strong dollar; not
d. Weak dollar; favorably
strong dollar; favorably
The ______ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ______ the percentage of a given financial statement item that is susceptible to translation exposure.
a. Smaller; greater
b. Greater; smaller
c. Greater; greater
d. None of the above
greater; greater
Economic exposure refers to:
a. The exposure of a firm’s cash flows to exchange rate fluctuations
b. The exposure of a firm’s international transactions to exchange rate fluctuations
c. The exposure of a firm’s local currency value to transactions between foreign exchange traders
d. The exposure of a firm’s financial statements to exchange rate fluctuations
the exposure of a firm’s cash flows to exchange rate fluctuations
Generally, MNCs with less foreign revenues than foreign costs will be _____ affected by a _______ foreign currency
a. Favorable; stronger
b. Not; weaker
c. Favorably; weaker
d. Not; stronger
favorably; weaker
In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ______ a(n) ____ local currency
a. Be hurt by; appreciated
b. Be hurt by; depreciated
c. Benefit from; depreciated
be hurt by; depreciated
The Canadian dollar’s volatility has changed over time but is normally less than the volatility of emerging currencies (T/F)
True
Economic exposure can affect:
a. MNCs and purely domestic firms
b. MNCs only
c. Purely domestic firms only
MNCs and purely domestic firms
