FIN 3604 - Exam 3

Sunk costs such as the research expense of the feasibility study of the project are the future cash flows of the project and hence should be par of the NPV calculation of the project. True False

False

The Checklist technique is a subjective method because it requires the financial manager to exercise his or her judgement and intuition. True False

False

There is a negative relation between home bias and the cost of capital. True False

False

Firms can easily shift exchange rate risks by invoicing foreign sales in home currency especially when the competition intensifies. True False

False

For an exporter to successfully hedge its FX receivable exposure, the exporter should buy FX forward. True False

False

Expropriation Risk

A host government forcibly takes over the ownership of privately owned property with little, if any, compensation to the owners.

Blockage of Fund Transfers

A host government may block fund transfers, which could force subsidiaries to undertake projects that are not optimal, just to make use of the funds.

Currency Inconvertibility

A host government may not allow the home currency to be exchanged into other currencies.

Indigenization Laws

A host government may require its nationals to hold a majority interest in an MNC's operation.

(MMH-exporter, 2/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge? A. Boeing buys US dollars in the spot market B. Boeing buys US dollars in the forward market C. Boeing buys British pounds in the spot market D. Boeing buys British pounds in the forward market E. Boeing sells British pounds in the forward market

A. Boeing buys US dollars in the spot market

Your firm has a British customer who is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use? A. $1.90 = £1.00 B. $1.85 = £1.00

A. $1.90 = £1.00

OneUSF, a U.S. MNC based in Florida, plans to build a wholly owned manufacturing facility in Italy. The firm's existing operation has already accumulated a net amount of €800,000, which can be used to partially finance the construction cost. Current exchange rate is $1.32/€1.00. The long-run U.S. inflation rate per annum is 3 percent. The long-run Eurozone inflation rate per annum is 2.1 percent. The marginal corporate tax rate in Italy and the U.S. is 35%. The accumulated restricted funds were earned under special tax concessions offered during the initial years of the sales operation, and taxed at a marginal rate of 20 percent. If they were repatriated, additional tax at the 35 percent marginal rate would be due, but with the foreign tax credit given for the Italian taxes already paid. What is the present value of the accumulated restricted funds? (Please keep 2 digits in decimals to get the right answer) A. $198,000 B. $196,270 C. None of the above within $100 of the correct answer. D. 150,000 E. $199,500

A. $198,000 Explanation: Sales before the special tax concessions = €800,000/(1-0.2) = €1,000,000 Present value of Accumulated Restricted Funds = €1,000,000*($1.32/€1)*(0.35-0.2) = $198,000

Consider a U.S. MNC with three subsidiaries and the following transactions shown below. Use the method of multilateral netting to find the net exposure of the MNC. https://drive.google.com/file/d/1NCUd-RtomCfyMJT0Vk9bvnpq4ywpGFMl/view?usp=drivesdk A. $50 B. $30 C. $65 D. $60 E. $45

A. $50 Explanation: https://drive.google.com/file/d/1gT1B8-slPeeChqWgFIb4TbS2qX27RIuj/view?usp=drivesdk

Consider a U.S. MNC with three subsidiaries and the following transactions shown below. Use the method of multilateral netting to find the net exposure of the MNC. https://drive.google.com/file/d/1JlDJSwjySu28h8L0nnr4RP7GQX200lu7/view?usp=drivesdk A. $55 B. $65 C. $125 D. $210 E. $300

A. $55 Explanation: https://drive.google.com/file/d/18VFzdcrfRmPS3jUvAkdekRVoWm3xrZ2G/view?usp=drivesdk

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i) - the company can expand its potential investor base (ii) - issues involving the disclosure and listing requirements (iii) - creates a secondary market for the company's shares (iv) - liquidity (v) - volatility spillover from the overseas markets (vi) - control of the company by foreigners (vii) - enhances the visibility of the company's name and its products in foreign marketplaces Which of the following represent all the potential COSTS of the cross-border listings of stocks? A. (ii), (v), and (vi) B. (ii), (iv), (vi), and (vii) C. (i), (ii), and (iii) D. (iv), (v), (vi), and (vii) E. (i), (iii), (iv), and (vii)

A. (ii), (v), and (vi)

Which of the following corporate stakeholders may prefer firms to hedge foreign exchange risks? A. All choices are correct B. Suppliers C. Managers and employees D. Debtors E. Customers

A. All choices are correct

Which of the following can cause the incremental cash flows to the subsidiary to be different from the parent? A. All the statements correctly identify a cause B. Different corporate taxes in the host and home countries. C. The parent company may charge excessive fees to the subsidiary to minimize the remitted funds. D. The host government may place restrictions on whether the subsidiary's earnings must remain in the host country. E. Earnings converted to the currency of the parent company may be affected by exchange rate movements.

A. All the statements correctly identify a cause

In spring 2021, Chinese consumers boycotted buying products by MNCs including H&M and Nike because these firms expressed concerns about the use of forced labor in Xinjiang or pledged not to source from there. The incidence represents economic risk. True False

False

MMH-exporter, 3/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge? A. Boeing lends $10,873,786.41 in the United States now B. Boeing lends $11.2 million in the United States now C. Boeing lends $11,165.048.54 in the United States now D. Boeing lends $11,165.048.54 in the United States now

A. Boeing lends $10,873,786.41 in the United States now

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. How many call or put options should the UK firm to hedge a €100,000 receivables? A. Both choices are correct B. buy 10 put options on the euro with a strike in GBP C. buy 8 call options on the GBP with a strike in euro

A. Both choices are correct Explanation: To hedge the €100,000 receivables, the exporter should either sell €100,000 or buy £80,000 (€100,000/€1.25/£ = £80,000). Hence, buy 8 call options on the GBP with a strike in euro (£80,000/£10,000=8) or buy 10 puts on the euro with a strike in GBP (€100,000/€10,000 = 10)

Which of the following statement is FALSE? A. Empirical research shows a positive relation between a country's geopolitical risk and foreign direct investment in that country. B. Economic exposure is the sensitivity of the future home currency value of the firm's assets and liabilities and the firm's operating cash flow to random changes in exchange rates. C. Firms whose expenses are more sensitive to exchange rates than their revenue are most concerned that their home currency will depreciate against foreign currencies D. While diversifying production locations can mitigate the effect of exchange rate movements, the downside is that it can be a costly strategy to execute. E. Investing in green initiatives can be an effective strategy for domestic firms to deploy to build customer loyalty in face of growing foreign competition.

A. Empirical research shows a positive relation between a country's geopolitical risk and foreign direct investment in that country. Explanation: Empirical research shows a negative relation between a country's geopolitical risk and foreign direct investment in that country.

Saudi Arabia pegs its currency to U.Sl dollar. Therefore, Saudi is likely to experience ________ inflation when U.S. inflation rates fall. A. Falling B. Rising

A. Falling

A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year. Detail a strategy using forward contracts that will hedge his exchange rate risk. Spot exchange rate 1-year forward rate Contract size $1.00 = ¥100 $1.00 = ¥120 ¥12,500,000 A. Go short in 12 yen forward contracts B. Go short in 16 yen forward contracts C. Go long in 16 yen forward contracts D. Go long in 12 yen forward contracts

A. Go short in 12 yen forward contracts

Which of the following statement is FALSE? A. In the APV model, all cash flows are discounted at the firm's weighted average cost of capital. B. When making international capital budgeting decisions, the parent's perspective is appropriate because any project that can create a positive NPV for the parent should enhance the overall firm value. C. In theory, capital budgeting decision is the same for international and domestic investment, namely the decision rule is to accept positive NPV projects. D. When setting its optimal capital structure, the parent company should consider the financing decisions of its subsidiaries. E. International capital budgeting decision is much more complex than domestic ones because the incremental cash flows to the subsidiary can be very different from the parent.

A. In the APV model, all cash flows are discounted at the firm's weighted average cost of capital. Explanation: In the APV model, each cash flow is discounted at its inherent risk.

In graph https://drive.google.com/file/d/1h47SxFBPlvDRKCWBVz_uT0lw9cs39nxk/view?usp=drivesdk A. Kl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures. B. Kl and Kg represent, respectively, the cost of capital under international and local capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent, respectively, the optimal investment outlays under the alternative capital structures.

A. Kl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures.

Which of the following statements is CORRECT? A. The spot rate is a useful Market-Based Forecast if the expected percentage change in the currency is zero over the forecast period. B. Technical forecasting model can reliably forecast long-run exchange rates. C. There are three main types of methods to forecast exchange rates: technical forecasting, fundamental forecasting, and market-based forecasting. These three methods always make the same directional prediction regarding whether a currency is appreciating or depreciating. D. The technical forecasting is based on a wide range of data regarded as fundamental economic variables that determine exchange rates. In contrast, the fundamental forecasting focuses on a much smaller set of data, typically the historical exchange rates. E. Forward rate should provide more accurate forecasts for currencies in low-inflation countries than the spot rate.

A. The spot rate is a useful Market-Based Forecast if the expected percentage change in the currency is zero over the forecast period.

Which of the following intervention efforts represents direct intervention by the U.S. government? A. To boost the value of the Canadian dollar, the Federal Reserve exchanges U.S. dollars for Canadian dollars. B. The Federal Reserve increases the target for the inflation rate by two percentage points. C. The Federal Reserve announces that it is strongly considering intervening in the foreign exchange markets. D. The Federal Reserve decreases U.S. short-term interest rates. E. The U.S. government imposes restrictions on exchanging Canadian dollars for U.S. dollars.

A. To boost the value of the Canadian dollar, the Federal Reserve exchanges U.S. dollars for Canadian dollars.

Which of the following strategies can a firm deploy to manage its transaction exposure? A. Using financial instruments such as forwards and options B. Building a moat for its products by investing in R&D and product differentiation C. Sourcing inputs from low cost production sites D. Diversifying the markets to which the firm sells its products E. Following a flexible sourcing policy

A. Using financial instruments such as forwards and options

A purely domestic firm that sources and sells only domestically _____________. A. faces exchange rate risk to the extent that it has international competitors in the domestic market B. should never hedge FX risks since this could actually increase its currency exposure C. should never hedge FX risks unless the firm is able to pass on exchange rate risk to its customers D. faces no exchange rate risk

A. faces exchange rate risk to the extent that it has international competitors in the domestic market

Assume that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. Assume i$=6.1%, i£ = 10.9%, S0 = $1.50/£, F1 = $1.46/£ and S1= $1.60/£. By implementing this forward hedging strategy, Boeing ___________________. A. lost $1.4 million B. gained $1.4 million

A. lost $1.4 million Explanation: ($1.46/£-$1.60/£)*$10,000,000=-$1,400,000

An MNC faced with exposure to an appreciating foreign currency can reduce transaction exposure with a strategy of ____________________. A. paying early, collecting late B. paying late, collecting early C. paying or collecting early D. paying or collecting late

A. paying early, collecting late

A CFO should be least worried about ____________. A. translation exposure B. economic exposure C. transaction exposure

A. translation exposure

Sterilized intervention is more effective than nonsterilized intervention. True False

False

OneUSF, a U.S. MNC based in Florida, is considering making a fixed direct investment in Italy. The Italian government has offered OneUSF a concessionary loan of €2,700,000 at a rate of 3 percent per annum. The current spot rate is $1.36/€1.00 and the expected inflation rate is 4% in the U.S. and 2% in Italy. The normal borrowing rate is 7 percent in dollars and 6 percent in euros. The loan schedule calls for the principal to be repaid in three equal annual installments. The marginal corporate tax rate in Italy and the U.S. is 35%. What is the present value of the benefit of the concessionary loan? (Please keep 2 digits in decimals to get the right answer) A. $1,310,116 B. $117,160 C. $51,360 D. $1,165,209 E. None of the above with the $10,000 of the correct answer

B. $117,160 Explanation: S1 = S0*(1+US inflation)/(1+euro inflation) = $1.36/€1*(1.04)/(1.02) = $1.39/€1 S2 = S1*(1+US inflation)/(1+euro inflation) = $1.39/€1*(1.04)/(1.02) = $1.42/€1 S3 = S2*(1+US inflation)/(1+euro inflation) = $1.42/€1*(1.04)/(1.02) = $1.45/€1 Principal payment = €2,700,000/3 = €900,000 Interest payments in year 1 = €2,700,000*0.03 = €81,000 Interest payments in year 2 = (€2,700,000-€900,000)*0.03 = €54,000 Interest payments in year 2 = (€1,800,000-€900,000)*0.03 = €27,000 Present value of the cash outflows due to this concessionary Loan = 1.39*(900000+81000)/(1+0.07)+ 1.42*(900000+54000)/(1+0.07)^2+1.45*(900000+27000)/(1+0.07)^3 = $3,554,840 S0CL0, initial cost of the concessionary Loan = €2,700,000*$1.36/€1 = $3,672,00 Present value of concessionary loan = $3,672,00 - $3,554,840 = $117,160

Which of the following represents indirect intervention? A. intervention by other public institutions B. All of the actions represent indirect intervention C. imposition of foreign exchange regulations D. exercise of moral suasion that constrains foreign exchange activity E. aggressive use of interest rate policy

B. All of the actions represent indirect intervention

With regard to the financial structure of a foreign subsidiary, _____________ . A. an MNC that finances a foreign investment with home-country equity faces greater risk of expropriation than if it had financed the investment with at least some local debt or equity. B. All of the statements are correct C. there may be advantages other than a reduction in political risk that encourage MNCs to finance foreign subsidiaries with local money. D. borrowing from a well-established local bank can reduce political risk.

B. All of the statements are correct

Which of the following strategies can a firm deploy to manage its economic exposure? A. Building a moat for its products by investing in R&D and product differentiation B. All of the statements are correct. C. Selecting low cost production sites D. Diversifying the markets to which the firm sells its products E. Following a flexible sourcing policy

B. All of the statements are correct.

MMH_Importer, 1/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge? A. Boeing borrows $9,000,000 in the United States at the prevailing interest rate of 6.0% B. Boeing borrows $8,450,704 in the United States at the prevailing interest rate of 6.0% C. Boeing borrows £4,716,981 in the United Kingdom at the prevailing interest rate of 6.5% D. Boeing borrows £4,694,836 million in the United Kingdom at the prevailing interest rate of 6.5% E. Boeing borrows £5 million in the United Kingdom at the prevailing interest rate of 6.5%

B. Boeing borrows $8,450,704 in the United States at the prevailing interest rate of 6.0% Explanation: Transaction CF0 CF1 1. Borrow in $ +$8,450,704.23 -$8,450,704.23*1.06 = -8,957,746.48 2. Buy £, + £4,694,835.68 by selling $ -£4,694,835.68*$1.80/£ = - $8,450,704.23 3. Invest/lend in £ -£5,000,000.00/1.065. =£5,000,000.00 = £4,694,835.68 4. Pay £ in one year to Rolls-Royce -£5,000,000.00 Net cash flow. 0 - $8,957,746.48

Successful product differentiation gives the firm greater elastic demand-which may translate into less exchange rate risks. True False

False

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail strategies using options that will eliminate exchange rate risk given the following information: Option contract size Strike price Euro €62,500 ¥125 = €1.00 Yen ¥12,500,000 €0.008 = ¥1.00 A. Buy 16 put options on euro or sell 10 call options on yen. B. Buy 16 put options on euro or buy 10 call options on yen C. Sell 16 put options on euro or buy 10 call options on yen. D. Sell 16 call options on euro or buy 10 put options on yen.

B. Buy 16 put options on euro or buy 10 call options on yen Explanation: To hedge €1,000,000 receivables (positive FX cash flows), exporters should either 1) sell euro so that the negative FX cash flows offset the positive FX cash flows (to generate negative FX cash flows , exporters need to buy put on euro) or 2) buy yen by selling euro (buy call on yen). Both strategies results in replacing positive FX cash flows with positive cash flows in domestic currency Buy 16 put on euro: sell €62,500*16 = €1,000,000, negative €1,000,000 and hence unload the risk of €1,000,000 receivables paid in domestic currency (¥) in the amount of ¥125,000,000: sell €1,000,000 at the price ¥125 per €... €1,000,000*(¥125/€) = ¥125,000,000 buy 10 call on yen: buy ¥12,500,000*10 = ¥125,000,000 by paying €1,000,000, negative €1,000,000 and hence unload the FX receivables at price €0.008 per ¥: ¥125,000,000*(€0.008/¥) = €1,000,000

Which one of the following country risks make a country uninvestable? A. Inflation risk B. Expropriation risk C. Foreign exchange risk D. Corruption risk

B. Expropriation risk Explanation: Expropriation risk is the risk of foreign governments outright seize corporate assets (e.g., Cuba in 1960s). This risk is too large to mitigate.

Boeing imported a Rolls-Royce jet engine for £5 million in one year. Which of the following is true, given the market conditions of i$=6%, i£ = 6.5%, S0 = $1.80/£, F1 = $1.75/£? A. If Boeing decides to use a currency option contract to hedge its pound payable, it should buy put option B. If Boeing decides to use a currency option contract to hedge its pound payable, it should buy call option

B. If Boeing decides to use a currency option contract to hedge its pound payable, it should buy call option Explanation: To hedge FX payable risk (negative FX cash outflow), importers should buy FX call options (positive FX cash inflow)

Which of the following statements is FALSE? A. When a parent is deciding whether to undertake an international project, it should determine whether the project is feasible from its own, not its subsidiary's, perspective. B. In the APV model, depreciation tax shields are discounted at the cost of equity. C. When making capital budgeting decisions, the parent company should only consider operating cash flows that are available for remittance back to the parent company. D. Each subsidiary should make its capital budgeting decisions using the required rate of return specific to the subsidiary. E. Few capital budgeting decisions at the subsidiary level have the same level of risk as those at the level of the parent company.

B. In the APV model, depreciation tax shields are discounted at the cost of equity.

A Brazilian exporter to Europe invoices goods in EUR and expects to receive EUR 4 million in 3-months. A 3-month forward contract is available at a EURBRL rate of 2.7513. How should the Brazilian exporter construct a forward market hedge to manage the FX exposure? A. The Brazilian exporter takes a long position in the forward contract of EUR 4 million at the 3-month forward EURBRL rate of 2.7513 B. The Brazilian exporter takes a short position in the forward contract of EUR 4 million at the 3-month forward EURBRL rate of 2.7513

B. The Brazilian exporter takes a short position in the forward contract of EUR 4 million at the 3-month forward EURBRL rate of 2.7513

Which of the following countries face the lowest level of political risk in the form of corruption? A. Malaysia B. The United States C. China D. Brazil C. Syria

B. The United States

Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg under an internationalized capital structure. The take-away lesson from the graph is that ________________________________ . https://drive.google.com/file/d/1h47SxFBPlvDRKCWBVz_uT0lw9cs39nxk/view?usp=drivesdk A. Kl and Kg represent, respectively, the cost of capital under international and local capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures B. The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's value

B. The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's value

Which of the following may explain that the APV is lower for the subsidiary than for the parent? A. The subsidiary may have a lower marginal cost of capital. B. The foreign tax rate is higher C. The tax rate on the remitted funds is low. D. The subsidiary's cash flows are blocked by the host country from being remitted to the parent.

B. The foreign tax rate is higher

Boeing imported a Rolls-Royce jet engine for £4 million in one year. Which of the following is true, given the market conditions of i$=6%, i£ = 5.5%, S0 = $1.80/£, F1 = $1.75/£? A. To hedge this FX exposure using forward contracts, Boeing should invest $4 million today in the United States B. To hedge this FX exposure using forward contracts, Boeing should buy £4 million forward in exchange for $7,000,000 C. If S1 = $1.70/£, Boeing would have gained $0.2 million from forward hedging

B. To hedge this FX exposure using forward contracts, Boeing should buy £4 million forward in exchange for $7,000,000 Explanation: To hedge the FX payables, Boeing should buy FX forward, £4 million*$1.75/£ = $7,000,000

An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of _______________. A. paying or collecting late B. paying late, collecting early C. paying early, collecting late D. paying or collecting early

B. paying late, collecting early

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i) - the company can expand its potential investor base (ii) - issues involving the disclosure and listing requirements (iii) - creates a secondary market for the company's shares (iv) - liquidity (v) - volatility spillover from the overseas markets (vi) - control of the company by foreigners (vii) - enhances the visibility of the company's name and its products in foreign marketplaces Which of the following represent all the potential BENEFITS of the cross-border listings of stocks? A. (ii), (iv), and (v) B. (i), (ii), and (iii) C. (i), (iii), (iv), and (vii) D. (iv), (v), (vi), and (vii)

C. (i), (iii), (iv), and (vii)

Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability? A. Buy a call option on £100,000 with a strike price in dollars. B. Take a long position in a forward contract on £100,000 with a 3-month maturity. C. All the strategies, executed correctly, will hedge the FX risk. D. Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.

C. All the strategies, executed correctly, will hedge the FX risk.

Which of the following is correct? A. Weighted average cost of capital > cost of common equity > cost of debt B. Cost of common equity > cost of debt > weighted average cost of capital C. Cost of common equity > weighted average cost of capital > cost of debt

C. Cost of common equity > weighted average cost of capital > cost of debt

Which of the following statement is FALSE? A. The potential effectiveness of a central bank's direct intervention is influenced by the amount of reserves it can use. The larger the FX reserves, the more effective the intervention is likely to be. B. Direct government intervention typically does not have a permanent effect on exchange rate movements. C. Direct intervention by central banks to smooth exchange rate movements are always successful. D. Direct intervention is more likely to be effective when it is coordinated by several central banks. E. When central banks intervene in the foreign exchange market without adjusting for the change in the money supply, it is engaging in a nonsterilized intervention.

C. Direct intervention by central banks to smooth exchange rate movements are always successful. Explanation: Direct government invention has become less frequent because it has become less effective due to the tremendous growth in the FX market and the increasing globalization. For example, for direct government invention to the effective, the government needs to have large FX reserves. As the FX market has grown exponentially, the volume of FX transaction on a single day now exceeds the combined values of reserves at all central banks.

Which of the follow statements is FALSE? A. If a currency is appreciating, it is beneficial for a firm to pay its bills denominated in that currency early and let customers in that country pay late as long as they are paying in that currency. B. If a currency is depreciating, a firm can use the lead and lag strategy to reduce its transaction exposure by paying the obligations denominated in the depreciating currency as late as the contracts will allow. C. Facing a depreciating currency, the firm should give incentives to its customers who owe the firm in that currency to pay late. D. When the competition is intense, the lead and lag strategy may be infeasible to deploy. However, a multinational company can aggressively use the lead and lag strategy to deal with intrafirm payables and receivables.

C. Facing a depreciating currency, the firm should give incentives to its customers who owe the firm in that currency to pay late.

Which of the following statements is FALSE? A. Forecasting exchange rates tends to be more accurate for short-term than for long-term time horizon. B. While the inflation differential by itself is not sufficient to accurately forecast exchange rate movements, it should be included in any fundamental forecasting model of exchange rates. C. Forward rate should provide more accurate forecasts for currencies in low-inflation countries than the spot rate. D. Forecasting exchange rates can influence an MNC's decision about whether its foreign subsidiary should reinvest earnings in a foreign country or remit earnings back to the parent. E. It is extremely difficult to forecast exchange rates with accuracy.

C. Forward rate should provide more accurate forecasts for currencies in low-inflation countries than the spot rate.

Currency forward contract is the most direct and popular way of hedging transaction exposure because _______________________. A. Forwards are marked to market daily B. Forwards are traded competitively on organized exchanges C. Forwards can be tailored made in terms of contract size and delivery date to meet the clients' needs D. Forwards are standardized contracts and guaranteed by the clearing house

C. Forwards can be tailored made in terms of contract size and delivery date to meet the clients' needs Explanation: The other choices are incorrect; they are the characteristics of future contracts.

The _____________ technique is a subjective method because it requires the financial manager to exercise his or her judgement and intuition. A. Delphi B. Checklist C. Heuristic D. Quantitative

C. Heuristic

Which of the following is NOT an economic risk? A. Inflation rate risk B. Slow GDP growth rate C. Inefficient bureaucracy D. Fiscal imbalance E. Interest rate risk

C. Inefficient bureaucracy

Which of the following statement is FALSE? A. If you owe a foreign currency denominated debt, you can hedge with buying the foreign currency today and investing it in the foreign county. B. Buying a currency option limits the downside risk while preserving the upside potential. C. The choice between a forward market hedge and a money market hedge often comes down to fisher effect. D. The most direct and popular way of hedging transaction exposure is by currency forward contracts.

C. The choice between a forward market hedge and a money market hedge often comes down to fisher effect.

When the choice of financing a foreign subsidiary is between external debt and equity financing, _________________. A. political risk considerations tend to favor equity financing B. political risk is separate from financial risk and so does not enter into a discussion of debt-to-equity ratios C. political risk considerations tend to favor debt financing

C. political risk considerations tend to favor debt financing Explanation: Using debt, rather than equity, to finance foreign subsidiary is typically less risky because in financial distress debtholders have senior claim than equityholders.

War

Conflicts with neighboring countries or internal turmoil can affect the safety of employees hired by an MNC's subsidiary or by salespeople who attempt to establish export markets for the MNC.

OneUSF, a U.S. MNC based in Florida, plans to build a wholly owned manufacturing facility in Italy. The cost of constructing the manufacturing plant is estimated at €3,000,000. The Italian government will allow the plant to be depreciated straight-line over a 3-year period. The normal borrowing rate for OneUSF is 8 percent in dollars and 7 percent in euros. In dollar terms, OneUSF uses 12 percent all-equity cost of capital. Current exchange rate is $1.14/€1.00. The long-run U.S. inflation rate per annum is 2.8 percent. The long-run Eurozone inflation rate per annum is 2.1 percent. The marginal corporate tax rate in Italy and the U.S. is 35%. What is the present value of the depreciation tax shield? (Please keep 2 digits in decimals to get the right answer) A. $1,010,684 B. $974,510 C. None of the above is within $10,000 of the correct answer D. $1,045,839 E. $1,065,058

D. $1,045,839 Explanation: S1 = S0*(1+US inflation)/(1+euro inflation) = 1.14*(1.028)/(1.021) = 1.15 S2 = S1*(1+US inflation)/(1+euro inflation) = 1.15*(1.028)/(1.021) = 1.16 S3 = S2*(1+US inflation)/(1+euro inflation) = 1.16*(1.028)/(1.021) = 1.17 Annual depreciation amount = €3,000,000/3 = €1,000,000 Present value of depreciation tax shield= 1.15*0.35*1000000/(1+0.08)+ 1.16*0.35*1000000/(1+0.08)^2+1.17*0.35*1000000/(1+0.08)^3 = $1,045,839

Which of the following may be a consequence of a STRONG currency? A. A strong home currency stimulates foreign demand for domestic products. B. A strong home currency may boost domestic employment. C. A strong home currency may lead to higher inflation. D. A strong home currency increases the purchasing power of domestic consumers and firms (i.e., ability to buy goods from other countries).

D. A strong home currency increases the purchasing power of domestic consumers and firms (i.e., ability to buy goods from other countries).

When exchange rates change, ___________________. A. it can alter the operating cash flow of a domestic firm B. it can alter the home currency values of a multinational firm's assets and liabilities C. it can alter the competitive position of a domestic firm D. All of the statements are correct.

D. All of the statements are correct.

Which of the following statement is FALSE? A. Larger firms are more likely to hedge currency exchange rate risk than smaller firms. B. Unexpected exchange rate changes can alter the operating cash flow of a domestic firm. C. Firms may be able to create value for their shareholders by issuing securities in foreign as well as domestic markets when international financial markets are not fully integrated. D. An exporter can successfully hedge its account receivables by buying FX forward. E. Managers understand the impact of FX changes on assets and liabilities better than the impact of FX movements on operating cash flows because changes to assets and liabilities are more easily and readily measurable than factors that can impact operating cash flows over a long period of time.

D. An exporter can successfully hedge its account receivables by buying FX forward. Explanation: An exporter can successfully hedge its account receivables by selling FX forward.

MMH_Importer, 3/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge? A. Boeing lends $9 million in the United States now B. Boeing borrows £5 million in the United Kingdom now C. Boeing borrows $9 million in the United States now D. Boeing borrows $8,450,704.23 in the United States now

D. Boeing borrows $8,450,704.23 in the United States now Explanation: Transaction CF0 CF1 1. Borrow in $ +$8,450,704.23 -$8,450,704.23*1.06 = -8,957,746.48 2. Buy £, + £4,694,835.68 by selling $ -£4,694,835.68*$1.80/£ = - $8,450,704.23 3. Invest/lend in £ -£5,000,000.00/1.065. =£5,000,000.00 = £4,694,835.68 4. Pay £ in one year to Rolls-Royce -£5,000,000.00 Net cash flow. 0 - $8,957,746.48

(MMH-exporter, 1/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a correct step of a money market hedge? A. Boeing borrows £10 million in the United Kingdom at the prevailing interest rate of 3% B. Boeing borrows £10 million in the United Kingdom at the prevailing interest rate of 2% C. Boeing borrows £9,803,921.57 in the United Kingdom at the prevailing interest rate of 2% D. Boeing borrows £9,708,737.86 in the United Kingdom at the prevailing interest rate of 3%

D. Boeing borrows £9,708,737.86 in the United Kingdom at the prevailing interest rate of 3% Explanation: Transaction CF0 CF1 1. Borrow in £ £10,000,000/1.03. -£10,000,000.00 = +£9,708,737.86 2. Buy $, £9,708,737.86*$1.12/£ = +$10,873,786.41 by selling £ -£9,708,737.86 3. Invest/lend in $ -$10,873,786.41. $10,873,786.41*1.02 = +$11,091,262.14 4. Collect £ in one year from British Airway +£10,000,000.00 Net cash flow 0 + $11,091,262.14

(MMH_Importer, 2/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market hedge? A. Boeing buys British pounds in the forward market B. Boeing sells British pounds in the forward market C. Boeing buys US dollars in the forward market D. Boeing buys British pounds in the spot market E. Boeing buys US dollars in the spot market

D. Boeing buys British pounds in the spot market Explanation: Transaction CF0 CF1 1. Borrow in $ +$8,450,704.23 -$8,450,704.23*1.06 = -8,957,746.48 2. Buy £, + £4,694,835.68 by selling $ -£4,694,835.68*$1.80/£ = - $8,450,704.23 3. Invest/lend in £ -£5,000,000.00/1.065. =£5,000,000.00 = £4,694,835.68 4. Pay £ in one year to Rolls-Royce -£5,000,000.00 Net cash flow. 0 - $8,957,746.48

Which of the following statements is FALSE? A. American Depository Receipt (ADR) is a negotiable U.S. certificate representing ownership of shares in a non-U.S. corporation. B. A non-U.S. firm's willingness to comply with U.S. disclosure requirements and securities regulations signals its quality and provides better protection of shareholders' interests. C. While a cross-border listing can signal better protection of shareholders' interests and a greater commitment to transparency, this transparency has a cost in management time and comes with greater risk of shareholder lawsuits and regulatory scrutiny. D. European firms represent the largest contingent of foreign listings on U.S. exchanges E. Foreign listing allows a firm's stock to become part of the global portfolio.

D. European firms represent the largest contingent of foreign listings on U.S. exchanges Explanation: Canadian firms represent the largest contingent of foreign listings on U.S. exchanges

Which of the following statement is FALSE? A. Few capital budgeting at the subsidiary level have the same level of risk as the parent. B. The adjusted present value model extends the net present value model's principal of value additivity approach. C. When making capital budgeting decisions, a subsidiary should use the discount rate that is specific to the risk of the project that the subsidiary is undertaking in the foreign country rather than the parent's cost of capital. D. In the APV model, operating cash flows are discounted at subsidiaries' unlevered cost of equity. E. If subsidiaries use firm-level, rather than project-specific, cost of capital to make capital budgeting decisions, over time risky projects with negative investment returns will be accepted.

D. In the APV model, operating cash flows are discounted at subsidiaries' unlevered cost of equity.

(MMH-exporter, 4/4) Suppose that Boeing exported a Boeing 737 to British Airways and billed £10 million payable in one year. The market conditions are given as follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Is there a profitable money market hedging opportunity for Boeing compared to forward market hedge? A. Yes, because the intrinsic interest rate in the US is greater than the market rate B. Yes, because the intrinsic interest rate in the US is less than the market rate C. No, because the intrinsic interest rate in the UK is greater than the market rate D. No, because the intrinsic interest rate in the US is greater than the market rate

D. No, because the intrinsic interest rate in the US is greater than the market rate Explanation: Transaction CF0 CF1 1. Borrow in £ £10,000,000/1.03. -£10,000,000.00 = +£9,708,737.86 2. Buy $, £9,708,737.86*$1.12/£ = +$10,873,786.41 by selling £ -£9,708,737.86 3. Invest/lend in $ -$10,873,786.41. $10,873,786.41*1.02 = +$11,091,262.14 4. Collect £ in one year from British Airway +£10,000,000.00 Net cash flow 0 + $11,091,262.14 If using forward market hedge, £10,000,000.00*$1.15/£ = $11,500,000, which is greater than $11,091,262.14, indicating that the money market hedge lost $408,737.86 Per Interest Rate Parity: F/S = (1+i*$)/(1+i£) => 1.15/1125 = (1+i*$)/(1+1.03) => i*$ = 5.759% > the market rate of 2%, which means that the exporter should borrow in the US

(MMH_Importer, 4/4) A Boeing imported a Rolls-Royce jet engine for £5 million in one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 = $1.80/£, F1 = $1.75/£. Is there a profitable money market hedging opportunity for Boeing compared to forward market hedge? A. Yes, because the intrinsic interest rate in the UK is less than the market rate B. No, because the intrinsic interest rate in the US is greater than the market rate C. Yes, because the intrinsic interest rate in the US is greater than the market rate D. No, because the intrinsic interest rate in the US is less than the market rate

D. No, because the intrinsic interest rate in the US is less than the market rate Explanation: Transaction CF0 CF1 1. Borrow in $ +$8,450,704.23 -$8,450,704.23*1.06 = -8,957,746.48 2. Buy £, + £4,694,835.68 by selling $ -£4,694,835.68*$1.80/£ = - $8,450,704.23 3. Invest/lend in £ -£5,000,000.00/1.065. =£5,000,000.00 = £4,694,835.68 4. Pay £ in one year to Rolls-Royce -£5,000,000.00 Net cash flow. 0 - $8,957,746.48 If using forward market hedge, £5,000,000.00*$1.75/£ = -$8,750,000, which is less than $8,957,746.48 indicating that using forward hedge saves Boeing $207,746.48 in profits ($8,957,746.48-$8,750,000=$207,746.48) Per Interest Rate Parity: F/S = (1+i*$)/(1+i£) => 1.75/1.8 = (1+i*$)/(1+1.065) => 0.97222 = (1+i*$)/1.09 => 0.97222*1.065=(1+i*$) => 1.035417 = 1+i*$ => i*$ = 3.5417% < the market rate of 6%, which means that the right strategy is to lend in the US.

Which of the following strategies can a firm deploy to manage its economic exposure? A. Use multilateral netting B. Deploy lead-lag strategy C. Use money market hedge D. Selecting low cost production sites E. Use forward hedge

D. Selecting low cost production sites

Which of the following does NOT explain the decision of multinational corporations (MNCs) to forecast exchange rates? A. MNCs sometimes have a substantial amount of excess cash available for a short time period. Forecasting exchange rates can help MNCs decide in which currency they can best deposit the excess cash and earn additional cash flows. B. When an MNC assesses whether to invest funds in a foreign project, it takes into account that the project may periodically require the exchange of currencies. C. Forecasting exchange rates can help MNCs determine whether they should hedge foreign exchange risks or not. D. The MNC has operations in all member countries in the Eurozone, but has no operation out the Eurozone. E. Multinational corporations that issue bonds to secure long-term funds may consider denominating the bonds in foreign currencies.

D. The MNC has operations in all member countries in the Eurozone, but has no operation out the Eurozone.

What may be the reasons that the APV is higher for the subsidiary than for the parent? A. The foreign tax rate is higher. B. The parent charges its subsidiary high administrative fees. C. The subsidiary may have a higher marginal cost of capital. D. The host country imposes restrictions on remittances

D. The host country imposes restrictions on remittances

Which of the following statement is FALSE? A. The choice between a forward market hedge and a money market hedge often comes down to interest rate parity. B. If you owe a foreign currency denominated debt, you can hedge with buying the foreign currency today and investing it in the foreign county. C. If you own a foreign currency denominated bond, you can hedge with a swap contract where pay the cash flows of the bond in exchange for dollars. D. The most direct and popular way of hedging transaction exposure is by currency future contracts.

D. The most direct and popular way of hedging transaction exposure is by currency future contracts. Explanation: The most direct and popular way of hedging transaction exposure is by currency forward contracts.

To mitigate country risk, an MNC can ____________ . i) increase the required rate of return ii) extend the minimum payback period iii) adjust operating cash flows iv) buy insurance v) risk sharing A. ii, iii, and v B. All of the above strategies work to mitigate country risk C. i, iv, and v D. i, iii, iv, and v E. i, ii, and iii

D. i, iii, iv, and v Explanation: To mitigate country risk, an MNC should shorten the minimum payback period

The parent company should decide the financing method for its own subsidiaries ________________. A. by copying the norms of the host country. B. with a view toward gaming the bankruptcy system of the host country. C. with a view toward minimizing the amount of debt that the subsidiary borrows from the local market D. with a view toward minimizing the parent's overall cost of capital E. by seeking financing in countries with the highest equity risk premium

D. with a view toward minimizing the parent's overall cost of capital

Which of the following statement is FALSE? A. A higher interest rate curbs domestic consumption and hence can improve current account deficit. B. When investors become confident to invest in a country, that country's currency tends to strengthen. C. Investors view a lack of independence of the central bank as a major risk. D. Cutting interest rates can lead to easy credits to households and businesses, which may fuel demand for imports. E. A conventional view held by economists and central bankers is that high interest rate leads to inflation.

E. A conventional view held by economists and central bankers is that high interest rate leads to inflation.

Currency futures contract is a more popular way for firms to hedge FX exposure because it allows firms to tailor the contract terms to meet firm-specific needs. True False

False

Which of the following statements is FALSE? A. Firms can create value for their shareholders by issuing securities in foreign as well as domestic markets when international financial markets are not fully integrated. B. If a firm's cash inflows come from sources all over the world, those cash inflows may be more stable because the firm's total sales will not be highly influenced by a single economy. C. ADR is quoted and traded in USD on a U.S. securities market. D. An MNC's access to the international capital markets may allow it to obtain funds at a lower cost than that paid by domestic firms. E. A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects.

E. A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects. Explanation: A reduced cost of capital increases the firm's value through increased investments in new projects NOT through revaluation of the cash flows from existing projects.

Will a domestic firm, say a bicycle manufacturer, that sources, produces, and sells only in the U.S be impacted by FX fluctuation? i. Yes, if the firm's product competes against imported bicycles. ii. Yes, because the firm's customers are comparing the cost and features of the domestic bicycles against imported foreign bicycles iii. No, because changes in exchange rates only affect firms that are directly engaged in international trade, but not purely domestic firms. iv.The domestic firm will only be negatively impacted if the dollar is depreciating again the currencies whose countries export bicycles to the United States. A. iii B. i, ii, and iv C. i D. ii E. Both i and ii

E. Both i and ii

Which of the following countries face the highest level of political risk in the form of corruption? A. Finland B. Sweden C. The United States D. The United Kingdom E. Cambodia

E. Cambodia

Which of the following statements make the best argument for why firms should NOT hedge exchange rate risks? A. Exchange rate risk is irrelevant because many multinational companies are similarly affected by exchange rate movements. B. Exchange rate risk is irrelevant for multinational companies (MNCs) because an MNC generates cash flows in numerous currencies. The exchange rate movements of many currencies can easily, exactly offset each other. C. Exchange rate risk is irrelevant because stakeholders do not care about the financial distress risk that adverse effects of exchange rate movements may cause. D. Exchange rate risk is irrelevant because it is extremely difficult to hedge exchange risks profitably. E. Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own.

E. Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own.

Which of the following represents the most extreme form of political risk? A. Extra taxation B. Corruption risk C. Fund transfer restrictions D. Inefficient bureaucracy E. Expropriation risk

E. Expropriation risk

Which of the following may be a motivation for firms to undertake hedging? A. Firms can use hedging to increase the volatility of cash flows. Financial market rewards riskier firms with higher returns. B. Firms incurs higher hedging costs than investors. C. Firms do not create value for investors by hedging because foreign exchange markets are perfectly efficient. D. Management has limited knowledge about the firm's foreign exchange exposure and hence investors, rather than the firms, should hedge foreign exchange risks. E. Investors face inherent information asymmetry about the firm's operation including its foreign exchange exposure. Therefore, the firm's management is in the best position to hedge.

E. Investors face inherent information asymmetry about the firm's operation including its foreign exchange exposure. Therefore, the firm's management is in the best position to hedge.

Which of the following statements is FALSE? A. Managers should be skeptical of foreign projects that are feasible only if one particular model is used to forecast exchange rate. B To apply FX forecasts consistently, forecasts should normally be established by a centralized department and not form a department focused on the sales of a particular product. C. The ability to forecast currency values may vary with the currency of concern. D. Because forecasting exchange rates is subject to considerable error, managers of multinational corporations should complement their forecast with one from another source. E. Managers of different functional areas at a multinational corporation should use its proprietary model to forecast exchange rate movements so that the extreme forecasts cancel each other out and the average forecast represents the most likely outcome.

E. Managers of different functional areas at a multinational corporation should use its proprietary model to forecast exchange rate movements so that the extreme forecasts cancel each other out and the average forecast represents the most likely outcome. Explanation: Incorrect. All managers of a multinational corporation should use the same exchange rate forecast model. Otherwise, one manager may be making decisions based on forecasted appreciation of a currency while another manager may be making decision based on the forecasted decrepitation of the same currency.

Which of the following countries has the lowest implied cost of capital? A. India B. South Africa C. Finland D. Argentina E. The United States

E. The United States

Which of the following statements is FALSE? A. A firm's economic exposure is determined by a firm's ability to mitigate the effect of FX changes by adjusting its market, product mix, and sourcing. B. While many managers understand the effects of random exchange rate changes on the dollar value of their firms' assets and liabilities denominated in foreign currencies, they often do not understand the effect of volatile exchange rates on operating cash flows. C. Economic exposure represents the impact of exchange rate fluctuations on a firm's future cash flows. D. Even purely domestic firms can be affected by economic exposure. E. Transaction exposure can be managed by balancing the sensitivity of revenue and expenses to exchange rate fluctuations.

E. Transaction exposure can be managed by balancing the sensitivity of revenue and expenses to exchange rate fluctuations.

Economic exposure measures _____________________. A. the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes B. the effect of changes in exchange rates will have on the consolidated financial reports of an MNC C. the exposure of an MNC's contractual transactions to exchange rate movements. D. the effect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency E. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate

E. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate

Which of the following statement is FALSE? A. If the United States is your home country and if you have zero home bias, then you should invest 20% of your money in global stocks if the US equity market is 80% of the global equity market. B. An MNC can face a higher cost of capital than a domestic firm if the MNC is highly exposed to exchange rate risk or country risk. C. Generally speaking, investors from all countries exhibit home bias. D. There is a negative relation between home bias and the cost of capital. E. If a firm generates sales from all over the world, the firm's revenue may be more stable because it will not be highly influenced by a single economy.

Explanation: There is a positive relation between home bias and the cost of capital.

An exporter faced with the exposure to an appreciating currency benefits by collecting early. True False

False

FX exposure refers to the impact of foreign exchange rate movements on firms' financial conditions. True False

True

FX payables are hedged using call options on FX (i.e., the FX is bought at the option exercise/strike price in home currency). True False

True

Firms whose revenue is more sensitive to exchange rates than their expenses are most concerned that their home currency will appreciate against foreign currencies. True False

True

It is more difficult for financial managers to assess the impact of unexpected FX movements on corporate operating cash flows (operating exposure) than the impact on assets and liabilities (asset exposure). True False

True

MNC's access to the international capital markets may allow it to obtain funds at a lower cost than that paid by domestic firms. True False

True

The APV model has and advantage over the NPV model in making international capital budgeting decisions because APV is more flexible in treating incremental cash flows True False

True

Under the method of mixed forecasting, multinational corporations use a combination of forecasting techniques, and the actual forecast of a currency is the weighted average of the various forecasting techniques. True False

True

When modeling the future cash flows in international capital budgeting decisions, the relative purchasing power parity is a popular tool used in forecasting future spot rates to convert foreign cash flows to home currency. True False

True