Ch. 21: International Corporate Finance

Select all that apply Conditions that must be present for absolute purchasing power to exist include which of the following? a. Tariffs and duties must exist in both countries b. The goods must be identical. c. Transaction fees must occur in both trading directions d. There must be no trade barriers.

b, d

__________ refers to a security issued in the US that represents shares of a foreign stock.

ADR

The _________ Interbank Offered Rate is the rate that most international banks charge one another for loans of Eurodollars overnight in the __________ market.

London; London

Select all that apply What are some ways in which a foreign subsidiary can remit cash flows to a parent? a. Management fees for central services b. Royalties for the use of trade names and patents c. Dividends d. Capital gains on stock holdings

a, b, c

In covered interest ___________, you are covered in the event of a change in the exchange rate because you lock in the forward exchange rate today.

arbitrage

A ______ trade is an agreement to exchange currency at some time in the future. a. backward b. forward c. contingent d. spot

b

The use of _______ exchange agreements can help reduce the short-term exposure to exchange rate risk. a. floating b. forward c. leveraged d. secret

b

Bonds that are issued in a single country and are usually denominated in that country's currency are called _____. a. Eurocurrency b. Eurobonds c. Foreign bonds

c

Unlike Eurobonds, _________ bonds are issued in a single country and are usually denominated in that country's currency.

foreign

In formulas involving the relationship between spot exchange rates, forward exchange rates, and interest rates, the T-bill rate can be used for the U.S. ___________ risk-free rate.

nominal

If U.S. dollars are deposited in banks outside the U.S. banking system, they are referred to as ___. a. expat currency b. Americurrency c. Yankee currency d. Eurocurrency

d

Select all that apply Which of the following are conditions necessary for absolute purchasing power parity? a. No transaction costs b. No trade barriers c. Identical goods d. Differing tax rates

a, b, c

Corporations with significant foreign operations are often called ___. a. seafarers b. multinationals c. global marketers d. relationship bankers

b

If an international firm borrows money in the foreign country where it has operations it can reduce ___. a. short-run exchange rate exposure b. long-run exchange rate exposure c. cross-rate exposure d. triangle arbitrage

b

The unbiased forward rate condition may not hold if ___. a. banks set the forward rate to avoid covered interest rate arbitrage b. traders in the forward market are willing to pay a premium to avoid uncertainty c. the forward rate is higher than the current spot rate d. the forward and actual future spot rates are equal on average

b

The amount of foreign currency required to purchase one U.S. dollar is called the ______ exchange rate. a. indirect b. direct

a

An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called ____. a. triangle arbitrage b. a floating trade c. a forward trade d. a spot trade

c

The _______ rate is generally used for the U.S. nominal risk-free rate (RUS). a. T-note b. T-bond c. T-bill d. LIBOR

c

What is the difference in results between the home currency approach and the foreign currency approach? a. The home currency approach is more accurate b. The foreign currency approach is more accurate c. The two procedures produce the same answer d. The home currency approach yields a higher return

c

The number of U.S. dollars required to buy one unit of foreign currency is referred to as ___. a. the cross-rate b. an indirect quote c. the European quote d. a direct quote

d

__________ refers to a bond issued in multiple countries but denominated in a single currency.

Eurobond

__________ refers to money deposited in a financial center outside of the country with the involved currency.

Eurocurrency

T/F: The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits.

True

__________ refers to the implicit exchange rate between two currencies quoted in a third currency.

Cross-rate

T/F: Political risk refers only to problems for U.S. companies caused by foreign governments.

False

Select all that apply The different types of exchange rate risk include which of the following? a. Short-term exposure b. Arbitrage exposure c. Long-term exposure d. Translation exposure

a, c, d

Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks? a. Triangle arbitrage risks b. Long-term exposure to exchange rate risk c. Home currency approach risks d. Short-run exposure to exchange rate risk

d

Exploiting a disequlibrium between spot rates, forward rates, and differences in interest rates is called _____. a. the international Fisher effect b. the foreign currency approach c. interest rate parity d. covered interest arbitrage

d

The ______ of one currency based on another country's currency is known as the exchange rate. a. price b. importance c. volume

a

The use of local financing from the government of the foreign country where the operation is located ___. a. can reduce political risk b. will increase translation exposure c. will increase political risk d. will eliminate translation exposure

a

Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___. a. long-term exposures to exchange rate risk b. short-term exposures to exchange rate risk c. the international Fisher effect d. the interest rate parity effect

a

Interest rate parity ___. a. eliminates covered interest arbitrage opportunities b. exists when the spot rate is equal to the future rate c. exists when spot rates are equal for multiple countries d. eliminates exchange rate fluctuations

a

The theory that real interest rates are equal across countries is called _________. a. the international Fisher effect b. interest rate parity c. purchasing power parity d. uncovered interest rate parity

a

Select all that apply The foreign currency approach to capital budgeting analysis _____. a. utilizes the uncovered interest parity relationship b. produces the same results as the home currency approach c. is computationally easier than the home currency approach d. computes the NPV of a project in both the foreign and domestic currency

b, c, d

Money deposited in a financial center outside the country whose currency is involved is called ___. a. an American Depository Receipt b. Eurodollars c. Eurocurrency d. multinational exchange currency

c

Which of the following agreements is a spot exchange rate for the Norwegian krone? a. 6.5NKr for $1 settled in 60 days b. 6.25NKr for $1 settled in 30 days c. 6NKr for $1 settled in 2 days d. 6.75NKr for $1 settled in 90 days

c

What is the implicit exchange rate between two currencies when both are quoted in a third currency? a. The prime rate b. The spot rate c. The federal-funds rate d. The cross-rate

d

The management of exchange rate risk should probably be centralized so that the firm has an understanding of ___. a. all the money that can be made trading in foreign exchange b. its overall positions in foreign currency c. the competition's foreign exchange positions

b

The price of one country's currency expressed in terms of another country's currency is called the ___. a. triangle rate b. exchange rate c. cross-rate d. depository rate

b

______ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies, thus eliminating any arbitrage possibilities. a. PPP b. IRP c. UFR d. LIBOR

b

When a U.S. company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to ___ exposure to exchange rate risk. a. short-term b. balance sheet c. long-term d. translation

d

Gilts are securities issued by the ___. a. German and Austrian governments b. British and Irish governments c. Australian government d. Spanish government

b

Select all that apply Which of the following refer to a firm with a large portion of its business outside of its parent country? a. An indirect foreign investment b. A franchise c. A multinational d. An international corporation

c, d

A security issued in the United States that represents shares of a foreign stock is called a(n) ___. a. gilt b. Eurobond c. Yankee security d. American Depository Receipt

d

The London Interbank Offer Rate is the cornerstone in pricing money markets and short-term debt because ___. a. interest rates are usually quoted as some spread over this rate b. LIBOR sets the foreign exchange rate for most currencies c. it sets banks' prime rates d. U.S. Treasury rates are based upon it

a

The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as ______. a. purchasing power parity b. inflation rate parity c. the Big Mac Index d. interest rate parity

a

An agreement to trade currencies within two business days at today's exchange rate is called a _____ trade. a. floating b. forward c. open d. spot

d

Changes in the value of international investments due to the actions of governments is referred to as ______ risk. a. exchange b. translation c. bureaucratic d. political

d

Currently $1 buys ¥89 on the spot market. The 6-month forward rate is ¥90. According to the unbiased forward rate condition, the expected spot rate for the yen in 6 months is ___. a. ¥89 b. ¥88 c. ¥91 d. ¥90

d

The foreign exchange market ___. a. is an over-the-counter market b. has one trading floor located in London c. is a market with multiple trading floors d. has six trading floors located around the globe

a

Select all that apply A foreign subsidiary can remit funds to the parent company in which of the following ways? a. Royalties b. Eurobonds c. Dividends d. Management fees

a, c, d

Which of the following transactions is equivalent to entering a forward contract for an importing firm? a. Buying futures on the foreign currency b. Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract c. Borrowing in the foreign currency of interest and investing in the domestic currency for the length of the forward contract d. Selling options on the foreign currency

b

According to the international Fisher effect, if real returns are higher in Brazil than in the United States, money would flow out of the U.S. financial markets into Brazilian markets and the result would be that asset prices in ___. a. the United States would fall and Brazil's returns would rise b. Brazil would rise and their returns would rise c. Brazil would rise and their returns would fall d. the United States would rise and Brazil's returns would rise

c

Relative purchasing power parity tells us that the exchange rate will rise if the U.S. inflation rate is lower than that of a foreign country. That foreign currency will then ______ in value relative to the US dollar. a. appreciate b. overheat c. stagnate d. depreciate

d

Select all that apply When compared to the home currency approach, which of the following are true for the foreign currency approach to capital budgeting? a. The foreign currency approach uses the international Fisher effect. b. The foreign currency approach computes NPV in both foreign and domestic currencies. c. The foreign currency approach is computationally easier. d. The foreign currency approach makes use of uncovered interest rate parity.

b, c

Select all that apply Which of the following are correct when describing purchasing power parity? a. Parity is expressed as both absolute and relative. b. Purchasing power parity is a major factor in the rate of change in exchange rates. c. Exchange rates adjust to keep purchasing power level between currencies. d. A unit of currency in any country will buy the same quantity of goods.

a, b, c

What are some strategies for hedging long-term exchange rate risk? a. Matching foreign currency inflows and outflows b. Lending in the foreign country where operations are located c. Seeking the World Bank's assistance in obtaining special investment terms d. Purchasing call and put options

a

Which of the following are ways for a U.S. corporation to reduce political risk in a foreign country? a. Use local financing b. Require top management to sit on boards of foreign corporations c. Require top management to run for local elections in the foreign country d. Make use of lobbying in the foreign country

a

Why is it more challenging to manage long-term exchange rate risk exposure than to hedge short-term risks? a. Shareholders and bondholders do not prefer to hedge long-term exchange rate risks. b. Organized forward markets do not exist for long-term needs of corporations. c. It is easily achieved but it is too expensive to implement. d. CEOs generally do not care because they do not stay with the same firm for the long-term.

b

T/F: For multinational firms, it is important to have decentralized departments for managing exchange rate risks so that there is a different team for each type of currency exposure.

False

The Tax Cuts and Jobs Act of 2017 introduced a new flat tax rate of ____________ percent which reduced the incentive for companies to leave cash overseas.

21

A bond issued in multiple countries, but denominated in a single currency is called _____. a. Foreign bond b. Eurobond c. Eurocurrency

b

FASB 52 requires that assets and liabilities be translated at the current exchange rate and that the gains and losses be recorded ____. a. only on income tax returns b. against shareholders' equity c. as a footnote to the financial statements d. as a normal part of the income statement

b

_________ PPP explains the exchange rate change over time. a. Proportional b. Relative c. Absolute d. Indirect

b

A __________ is a bond issued in multiple countries, but denominated in a single currency, typically the issuer's home currency.

eurobond

The day-to-day fluctuations in exchange rates create _____ exposure. a. short-term exchange rate risk b. political risk c. translation d. long-term exchange rate

a

The natural consequences of international operations in a world where relative currency values move up and down is called ____. a. exchange rate risk b. the international Fisher effect c. interest rate parity d. political risk

a