International Finance

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If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country True False

False

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible. False True

False

In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects. True False

False

Increases in relative income in one country versus another result in an increase in the first country's currency value. True False

False

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts False True

False

Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. False True

False

When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty. False True

False

If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then the British pound (£) is expected to ____ by about ____percent, according to the international Fisher effect (IFE). depreciate; 1.0 depreciate; 2.9 none of the above appreciate; 1.0 appreciate; 2.9

appreciate; 2.9

In the United States, the typical currency futures contract is based on a currency value in terms of: Canadian dollars. euros. U.S. dollars. British pounds.

U.S. dollars.

If you have bought a right to buy foreign currency, you are: a call buyer. a put buyer. a call writer. a put writer.

a call buyer.

Currency futures contracts sold on an exchange contain: a commitment to the owner, and are standardized. a right but not a commitment to the owner, and are standardized. a right but not a commitment to the owner, and can be tailored to the owner's desire. a commitment to the owner, and can be tailored to the owner's desire.

a commitment to the owner, and are standardized.

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant. a reduction in U.S. inflation accompanied by an increase in U.S. interest rates an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates a reduction in Japan's inflation accompanied by an increase in Japan's interest rates a reduction in U.S. inflation accompanied by an increase in Japan's inflation

a reduction in Japan's inflation accompanied by an increase in Japan's interest rates

Currency options sold through an options exchange contain: a commitment to the owner, and are standardized. a right but not a commitment to the owner, and can be tailored to the owner's desire. a right but not a commitment to the owner, and are standardized a commitment to the owner, and can be tailored to the owner's desire.

a right but not a commitment to the owner, and are standardized

Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent. about 9.63 about 11.64 about 10.63 about 11.12 about 11.97

about 10.63

Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the United States = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent. about 8.14 about 6.00 about 7.33 about 5.59 about 9.00

about 5.59

Which of the following is not a forecasting technique mentioned in your text? technical forecasting accounting-based forecasting market-based forecasting fundamental forecasting

accounting-based forecasting

If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements. semistrong-form weak-form all of the above strong-form

all of the above

Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions? options non-deliverable forward contracts futures contracts forward contracts all of the above are instruments used to cover foreign currency positions.

all of the above are instruments used to cover foreign currency positions.

Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects: an increased demand for British pounds. a decrease in the demand for British pounds. a decrease in the supply of British pounds for sale. an increase in the supply of British pounds for sale.

an increase in the supply of British pounds for sale.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be: an increased U.S. demand for euros and a decreased supply of euros for sale. a decreased U.S. demand for euros and an increased supply of euros for sale. a decreased U.S. demand for euros and a decreased supply of euros for sale. an increased U.S. demand for euros and an increased supply of euros for sale.

an increased U.S. demand for euros and a decreased supply of euros for sale.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be: an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant). appreciate depreciate but only briefly depreciate be unchanged

appreciate

Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate should ____ by about ____ over the year. depreciate; 1.9 percent depreciate; 3.94 percent appreciate; 3.94 percent appreciate; 1.9 percent

appreciate; 1.9 percent

Which of the following would likely have the least direct influence on a country's current account? national income inflation tariffs exchange rates a tax on income earned from foreign stocks

a tax on income earned from foreign stocks

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. greater; greater greater; smaller smaller; greater none of the above

greater; greater

LIBOR is: the maximum loan rate ceiling on loans in the international money market. the average inflation rate in European countries. the interest rate commonly charged for loans between banks. the maximum interest rate offered on bonds that are issued in London. the maximum deposit rate ceiling on deposits in the international money market.

he interest rate commonly charged for loans between banks.

According to the text, the forward rate is commonly used for: previous transactions. immediate transactions. bond transactions. hedging.

hedging.

Forward contracts contain: a right but not a commitment to the owner, and can be tailored to the owner's desire. a commitment to the owner, and are standardized. a commitment to the owner, and can be tailored to the owner's desire. a right but not a commitment to the owner, and are standardized.

a commitment to the owner, and can be tailored to the owner's desire.

Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies. False True

In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios. True False

In general, investors are attracted to stock markets in countries that allow very limited voting rights for shareholders. True False

A money market hedge involves taking a money market position to cover a future payables or receivables position. False True

A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast. True False

A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. False True

A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent. True False

An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it. False True

Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, that should reduce the U.S. balance-of-trade deficit with China. False True

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. True False

Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts. False True

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower. True False

Expectations of a currency crisis may trigger actions by investors and speculators that make the crisis worse. False True

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions are. False True

For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective True False

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency's value will change, and how they will interact to impact the currency's value True False

Futures and options are available for cross rates. False True

Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. True False

Hedgers should buy puts if they are hedging an expected inflow of foreign currency. True False

From 1944 to 1971, the exchange rate between any two currencies was typically: fixed within narrow boundaries. floating, and not subject to central bank intervention. nonexistent; that is, currencies were not exchanged, but gold was used to pay for all foreign transactions. floating, but subject to central bank intervention.

fixed within narrow boundaries.

Sensitivity analysis allows for all of the following except: consideration of alternative scenarios. focus on a single point estimate of future exchange rates. accountability for uncertainty. development of a range of possible future values.

focus on a single point estimate of future exchange rates.

Which of the following is not a limitation of fundamental forecasting? omission of other relevant factors from the model none of the above possible change in sensitivity of the forecasted variable to each factor over time forecasts needed for factors that have a lagged impact uncertain timing of impact of some factors

forecasts needed for factors that have a lagged impact

A weak home currency may not be a perfect solution to correct a balance-of-trade deficit because: foreign companies may reduce the prices of their products to stay competitive. it prevents international trade transactions from being prearranged. it increases the prices of exports by local companies. it reduces the prices of imports paid by local companies.

foreign companies may reduce the prices of their products to stay competitive.

An obligation to purchase a specific amount of currency at a specific exchange rate at a future point in time is called a: put option spot contract forward contract both B and D call option

forward contract

Which of the following is NOT mentioned in the text as a theory of international business? product cycle theory globalization of business theory imperfect markets theory theory of comparative advantage All of these are mentioned in the text as theories of international business.

globalization of business theory

A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC. False True

False

A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in a franchise in exchange for periodic fees. False True

False

Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk. True False

False

Forward rates are driven by the government rather than market forces True False

False

If graphical points lie above the perfect forecast line, then the forecast overestimated the future value. False True

False

If a firm is hedging payables with futures contracts, it may end up paying more for the payables than it would have had it remained unhedged if the foreign currency depreciates. True False

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal. True False

Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate. True False

Shareholders can have influence on a wider variety of management issues in some countries than in others. True False

Shareholders have more voting power in some countries than in others. False True

Shareholders in some countries may have more power to effectively sue publicly traded firms if their executives or directors commit financial fraud. True False

Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible. False True

Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries, and it may not be necessary to hedge the position of each individual subsidiary. True False

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations. False True

The Canadian dollar's volatility has changed over time but is normally less than the volatility of other currencies. False True

Which of the following is true of international money market securities? The securities are perceived to be very risky. The securities have a maturity of one to five years. The securities may be exposed to exchange rate risk. The securities issued by corporations are not subject to credit (default) risk.

The securities may be exposed to exchange rate risk.

Which of the following is not true regarding futures contracts? Unlike forward contracts, they are generally traded on an exchange. Futures contracts are standardized with respect to delivery date and size of the contract. Currency futures can be used by speculators who attempt to profit from exchange rate movements. There is an active over-the-counter market for currency futures contracts.

There is an active over-the-counter market for currency futures contracts.

Which of the following is not true regarding electronic communications networks (ECNs)? They have a visible trading floor. Trades are executed by a computer network. They allow investors to place orders on their computers. All of the above are true. They have been created in many countries to match orders between buyers and sellers.

They have a visible trading floor.

If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____ percent. 1.90 2.00 -1.87 none of the above

1.90

The forward rate is the exchange rate used for immediate exchange of currencies. True False

The interest rate commonly charged for loans between banks is called the cross rate. False True

An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar. False True

True

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent False True

The interest rate in developing countries is usually very low. True False

The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent True False

The legal protection of shareholders is the same among countries. True False

A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____. $15.00 none of the above $16.50 $13.64 16.50 euros

$16.50

Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? $15,625 $31,250 $22,136 $15,385

$15,385

The main effect of interest rate movements on exchange rates is through their effect on international trade. False True

The more intense the competition for a traded currency, the larger the bid/ask spread. False True

1 / 1 pts Which of the following is not a possible bid/ask quotation for the Barbados dollar? All of the above are possible bid/ask quotations. $.50/$.51 $.49/$.50 $.52/$.51 $.51/$.52

$.52/$.51

Assume that U.S. interest rates for the next three years are 5 percent, 6 percent, and 7 percent, respectively. Also assume that Canadian interest rates for the next three years are 3 percent, 6 percent, and 9 percent. The current Canadian spot rate is $.840. What is the approximate three-year forecast of the Canadian dollar's spot rate if the three-year forward rate is used as a forecast? $.890 $.854 $.840 $.856

$.856

Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are the expected dollar cash flows of Livingston Co.? $200,000 $100,000 $60,000 $160,000

$160,000

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? $47,500 $44,500 $526 million $556 million $45,000

$47,500

Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and the euro's value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of Live Co? $559,500 $582,500 $200,000 $393,500

$559,500

Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is-2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23. -$4,274 -$17,097 -$38,468 -$21,371

-$4,274

The most sophisticated forecasting techniques provide consistently accurate forecasts. True False

Assume that $1 is equal to .85 euros and 98 yen. The value of the yen in euros is 1.18 .0087 118 .01

.0087

A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? None of these are correct. 1.69 125 0.014 73.75

0.014

Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars? 13.28 30.12 10 39.84

Assume the following information: Exchange rate of Japanese yen in U.S.$ = $.011 Exchange rate of euro in U.S.$ = $1.40 Exchange rate of euro in Japanese yen = 140 yen What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage? 10 percent -$90,909 -9.09 percent $100,000

10 percent

Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL); 30 percent of the MNC's funds are lev and 70 percent are leu. The standard deviation of exchange movements is 10 percent for lev and 15 percent for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately: 13.15 percent. 12.04 percent. 17.28 percent. 14.50 percent.

13.15 percent.

The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____. 146.70 none of the above 55.21 48.90

146.70

Assume that U.S. and British investors require a real return of 2 percent. If the nominal U.S. interest rate is 15 percent, and the nominal British rate is 13 percent, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____. 3 percentage points below; appreciate by about 3 percent 2 percentage points above; depreciate by about 2 percent 3 percentage points above; depreciate by about 3 percent 3 percentage points below; depreciate by about 3 percent 2 percentage points below; appreciate by about 2 percent

2 percentage points below; appreciate by about 2 percent

The bid/ask spread for small retail transactions is commonly in the range of ____ percent. .5 to 1 10 to 15 3 to 7 .01 to .03

3 to 7

Intracompany trade makes up more than ____ percent of all international trade. 50 25 13 5 70

You are the treasurer of Arizona Corp. and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is: Future Spot Rate Probability $.46 20% $.48 30% $.52 50% The 90-day forward rate of the Australian dollar is $.50. What is the probability that the put option will be exercised (assuming Arizona purchased it)? 0 percent 50 percent none of the above 80 percent

50 percent

Assume that the bank's bid quote for the Mexican peso is $.126 and the ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? 775,194 793,651 12,600 12,900

793,651

Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____ percent. 8.8 -9.6 -8.8 9.6

8.8

If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all relevant private information, then ____ would be refuted. semistrong-form efficiency strong-form efficiency A and B weak-form efficiency B and C

A and B

Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place. One bank's ask price will fall, and the other bank's bid price will rise. One bank's bid/ask spread will widen, and the other bank's bid/ask spread will fall. A and C One bank's ask price will rise, and the other bank's bid price will fall.

A and C

If quoted exchange rates are the same across different locations, then ____ is not feasible. locational arbitrage covered interest arbitrage triangular arbitrage A and C

A and C

Which of the following does not represent the risk from using forward contracts? A forward contract is used to hedge payables or receivables and the amount to be received or paid is canceled. A forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price. A forward contract is used to hedge receivables, and the spot exchange rate at the expiration of the contract exceeds the contract price. A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price.

A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price.

Which of the following is not true regarding ADRs? ADRs sometimes allow for arbitrage opportunities. ADRs enable U.S. investors to avoid cross-border transactions. ADRs allow non-U.S. firms to tap into the U.S. market for funds. ADRs are denominated in the currency of the stock's home country

ADRs are denominated in the currency of the stock's home country

Certificates representing bundles of the stock of a non-U.S. firm are called: ADRs. Eurobonds. FRNs. LIBOR certificates

ADRs.

Which of the following is not true regarding limitations of PPP and the IFE? A limitation of the PPP and the IFE (because it relies on the PPP) is that other country characteristics besides inflation can affect exchange rate movements. All of the above are true. A limitation of the IFE is that the determination of the expected inflation rate is subject to error. A limitation in testing PPP is that the results will vary with the base period used.

All of the above are true.

Which of the following cannot be used to invest internationally? investment in MNC stocks American depository receipts (ADRs) exchange-traded funds (ETFs) international mutual funds All of the above can be used to invest internationally.

All of the above can be used to invest internationally.

Agency costs faced by MNCs may be larger than those faced by purely domestic firms because: foreign subsidiary managers raised in different cultures may not follow uniform goals. monitoring of managers located in foreign countries is more difficult. MNCs are relatively large. All of these are correct. monitoring of managers located in foreign countries is more difficult AND foreign subsidiary managers raised in different cultures may not follow uniform goals.

All of these are correct.

International trade: entails minimal risk. All of these are correct. is a relatively conservative approach to foreign market penetration. does not require a large amount of investment.

All of these are correct.

An MNC's value depends on all of the following, EXCEPT: the amount of the MNC's cash flows in a particular currency. All of these are factors. the exchange rate at which cash flows are converted to dollars. the MNC's required rate of return.

All of these are factors.

____ is not a bank characteristic important to customers in need of foreign exchange. Quote competitiveness Speed of execution Forecasting advice Advice about current market conditions All of these are important bank characteristics to customers in need of foreign exchange.

All of these are important bank characteristics to customers in need of foreign exchange.

Which of the following is NOT a factor that affects the bid/ask spread? volume inventory costs order costs All of these factors affect the bid/ask spread.

All of these factors affect the bid/ask spread.

Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables? Buy a pound call option. Buy a pound put option. Purchase pounds forward. Buy a pound futures contract.

Buy a pound put option.

Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions. Bank for International Settlements (BIS) International Finance Corporation (IFC) World Trade Organization World Bank International Development Association (IDA)

Bank for International Settlements (BIS)

If the interest rate is higher in the United States than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then: neither U.S. nor British investors could benefit from covered interest arbitrage. U.S. investors could possibly benefit from covered interest arbitrage. British investors could possibly benefit from covered interest arbitrage. A and B

British investors could possibly benefit from covered interest arbitrage.

Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk. False True

If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low. True False

A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the United Kingdom and increase U.S. imports from the United Kingdom. True False

Which of the following countries purchases the largest amount of exports by U.S. firms? Japan Mexico France Canada

Canada

____ purchases more U.S. exports than the other countries listed here. Canada Spain Italy Mexico

Canada

Which of the following is NOT an example of political risk? Consumers' income levels may decrease, thus decreasing consumption. Government may impose barriers on a subsidiary. Government may impose taxes on a subsidiary. Consumers may boycott the MNC.

Consumers' income levels may decrease, thus decreasing consumption.

Which of the following is not true regarding covered interest arbitrage? Covered interest arbitrage is a reason for observing interest rate parity (IRP). If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country. When interest rate disparity exists, covered interest arbitrage may not be profitable. All of the above are true. When interest rate parity holds, covered interest arbitrage is not possible.

Covered interest arbitrage is a reason for observing interest rate parity (IRP).

Which of the following is not true regarding covered interest arbitrage? Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. All of the above are true regarding covered interest arbitrage.

Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.

Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time. False True

An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance. True False

An MNC with receivables in Japanese yen purchases yen forward to hedge its exposure to exchange rate fluctuations. False True

An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction. True False

Which of the following is indicated by research regarding purchasing power parity (PPP)? There is no relationship between inflation differentials and exchange rate movements in the short run or long run. PPP clearly holds in the short run. PPP clearly holds in the long run. Deviations from PPP are less pronounced in the long run.

Deviations from PPP are less pronounced in the long run.

Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk? The firms have about the same level of exposure. Yanta Co. Neither firm has any exposure. Diz Co.

Diz Co.

As a result of the Sarbanes-Oxley Act, financial reporting costs were reduced, and many non-U.S. firms decided to place new issues of their stock in the United States. True False

Which of the following is NOT true regarding the Bretton Woods Agreement? Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels. Each country used gold to back its currency. All of these are true regarding the Bretton Woods Agreement. It called for fixed exchange rates between currencies. The agreement lasted from 1944 until 1971.

Each country used gold to back its currency.

Which of the following statements is NOT true? Outsourcing affects the balance of trade because it means that a service is purchased in another country. All of these are true. Sometimes, trade policies are used to punish countries for various actions. Exporters commonly complain that they are being mistreated because the currency of their country is too weak. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.

Exporters commonly complain that they are being mistreated because the currency of their country is too weak.

A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account. False True

A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time. True False

A balance-of-trade surplus indicates an excess of imports over exports. False True

A balance-of-trade surplus indicates an excess of merchandise imports over merchandise exports. True False

A centralized management style for an MNC results in relatively high agency costs. True False

A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs. True False

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. True False

A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. False True

A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. True False

A financial institution that expects a particular foreign currency to appreciate may try to benefit from its expectation by borrowing funds in that currency and repaying the loan after the exchange rate changes in the expected manner. False True

A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period. False True

A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting. False True

A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC. True False

A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. True False

A set of currency cash inflows is more volatile if the correlations are low. True False

A tariff is a maximum limit on imports. False True

A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to Britain and increase U.S. imports from Britain over time. True False

Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent False True

At any given point in time, a bank's bid quote will be greater than its ask quote. False True

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity. False True

Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency. True False

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options. False True

Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs. False True

Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil. False True

Eurobonds are certificates representing bundles of stock. False True

Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries. True False

Exporting of products by one country to other countries at prices below cost is called elasticity. True False

Forecast errors tend to be large for short forecast horizons. False True

Foreign exchange markets appear to be strong-form efficient. True False

Franchising is the process by which national governments sell state-owned operations to corporations and other investors. False True

From the U.S. perspective, an example of a cross exchange rate is the exchange rate between a non-U.S. country and the U.S. False True

Fundamental models examine moving averages over time and thus allow the development of a forecasting rule. True False

Global regulations prevent the internationalization of money markets. False True

If a U.S. firm sets up a plant in Mexico to benefit from low-cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product. False True

If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. True False

If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. False True

If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods. False True

If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors. True False

If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge. False True

If interest rate parity exists, the forward hedge will always outperform the money market hedge. True False

If interest rate parity holds, then the international Fisher effect must hold. False True

If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. True False

If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders). True False

If one foreign currency appreciates against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees. False True

If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate. True False

If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds. False True

If the pattern of currency values over time appears random, then technical forecasting is appropriate. True False

Institutional investors such as mutual funds or pension funds that have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC. False True

Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today. False True

International trade is the most common form of direct foreign investment (DFI). True False

Intracompany trade is the exporting of products by one country to other countries below cost. True False

MNCs commonly consider acquiring an existing foreign operation because the cost is less expensive than establishing a new subsidiary of the same size. True False

MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk. True False

Market-based forecasting involves the use of historical exchange rate data to predict future values. False True

Market-based forecasting is based on fundamental relationships between economic variables and exchange rates. False True

Most MNCs can completely hedge all of their transactions. True False

Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged. True False

Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate. False True

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate. True False

The Basel Accord is an agreement among the major European countries to make regulations on imports more uniform across European countries and to reduce taxes on goods traded between these countries. False True

The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. False True

The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the United States, the Dominican Republic, and Central American countries. False True

The Greece credit crisis in the 2012-2015 period refers to Greece being unable to obtain loans from any banks or governments. True False

The Single European Act prevented a trend toward increased globalization in the banking industry. True False

The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations. True False

The bid/ask spreads quoted on more liquid, heavily traded currencies are larger than the spreads on less liquid, less traded currencies. False True

The capital account reflects changes in country ownership of direct foreign investment. True False

The currency futures markets are regulated by the International Monetary Fund. True False

The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations. False True

The degree of financial information that must be provided by public companies is the same in all countries. False True

The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure. True False

The preferences of corporations and governments to borrow in foreign currencies on a short-term basis and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market. False True

The primary component of the capital account is the balance of trade. False True

The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time. True False

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies. False True

The strike price is also known as the premium price. True False

The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less. True False

The term LIBOR refers to international bonds that were issued in London. True False

The theory of comparative advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation. True False

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high. True False

The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries. False True

The valuation of an MNC is reduced if the required rate of return on its investments in foreign countries is reduced. True False

The word "covered" in "covered interest arbitrage" refers to the investors hedging their position to protect against the possibility of default risk. False True

To hedge a payables position with a currency option hedge, an MNC would write a call option. True False

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions. False True

Translation exposure affects an MNC's cash flows. True False

U.S. government officials would likely prefer that China devalue the yuan against the dollar. False True

U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs. True False

Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources. False True

Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts. False True

When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate. False True

When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading. False True

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan. True False

When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency. True False

When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency. False True

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency. False True

A purely domestic firm is never exposed to exchange rate fluctuations. False True

According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries. True False

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent. False True

An MNC's stock valuation will not be affected by translation exposure if the MNC's consolidated financial statements are prepared according to the accounting rules in FASB 52. False True

Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is the percentage change in the foreign currency. The coefficient is negative. This implies that the company's stock price increases if the foreign currency appreciates. False True

Assume that exchange rate movements were unusually stable in a recent period (but will not continue to be so stable in the future) that was used to derive the estimated maximum expected loss based on the VaR method. The estimated expected loss derived using VaR based on that recent period will likely overestimate the actual maximum expected loss in the future. False True

Assume that inflation in the United States is expected to be 9 percent, while inflation in Australia is expected to be 5 percent over the next year. Today you receive an offer to purchase a one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer. False True

Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency. False True

Currency correlations are generally negative. False True

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency. False True

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency True False

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date. False True

If a currency put option is out of the money, then the present exchange rate is less than the strike price. False True

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. False True

If purchasing power parity holds, then the Fisher effect must also hold. False True

If the IFE theory holds, that means that covered interest arbitrage is not feasible. True False

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate. True False

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset. False True

Interest rate parity can only hold if purchasing power parity holds. True False

Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations True False

Margin is used in the forward market to mitigate default risk. True False

Movements of foreign currencies tend to be more volatile for shorter time horizons. True False

Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries. False True

Purely domestic firms are never affected by economic exposure. False True

The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation. False True

The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time. False True

The forward premium is the price specified in a call or put option. True False

The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency. True False

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used. True False

The nominal interest rate can be measured as the real interest rate minus the expected inflation rate. True False

There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect. True False

Triangular arbitrage involves 3 transactions that must be executed at a single bank. True False

Two highly negatively correlated currencies move in tandem almost as if they are the same currency. False True

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen. True False

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible. False True

False

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure. False True

False

The ____, an accord among 117 nations, called for lower tariffs around the world. European Union Accord None of these are correct. General Agreement on Tariffs and Trade (GATT) Single European Act of 1987 North American Free Trade Agreement (NAFTA)

General Agreement on Tariffs and Trade (GATT)

Which of the following is probably not an example of the use of forward contracts by an MNC? All of the above are examples of using forward contracts. Hedging pound payables by selling pounds forward Hedging peso receivables by selling pesos forward Hedging peso payables by purchasing pesos forward Hedging yen payables by purchasing yen forward

Hedging pound payables by selling pounds forward

Which of the following is not true regarding IRP, PPP, and the IFE? The IFE suggests that a currency's spot rate will change according to interest rate differentials. PPP suggests that a currency's spot rate will change according to inflation differentials. IRP suggests that a currency's spot rate will change according to interest rate differentials. All of the above are true.

IRP suggests that a currency's spot rate will change according to interest rate differentials.

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.

Which of the following is NOT true with respect to spot market liquidity? The more willing buyers and sellers there are, the more liquid a market is. The spot markets for heavily traded currencies such as the Japanese yen are very liquid. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.

If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

Which of the following is not true regarding currency correlations? If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset. Two highly positively correlated currencies act almost as if they are the same currency. If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset. If two inflow currencies are negatively correlated, transaction exposure is somewhat offset.

If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset.

Which of the following is not true regarding economic exposure? The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. Even purely domestic firms can be affected by economic exposure. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. All of the above are true.

In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows.

Like the International Monetary Fund (IMF), the ____ is composed of a number of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. World Bank World Trade Organization (WTO) Bank for International Settlements (BIS) International Finance Corporation (IFC)

International Finance Corporation (IFC)

Which of the following is not a limitation of technical forecasting? It doesn't provide point estimates or a range of possible future values. It cannot be applied to currencies that exhibit a continuous trend for short-term forecasts. It cannot be applied to currencies that exhibit random movements. It's not suitable for long-term forecasts of exchange rates.

It cannot be applied to currencies that exhibit a continuous trend for short-term forecasts.

Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk? Neither firm has any exposure. Kriner Co. The firms have about the same level of exposure. Jacko Co.

Kriner Co.

Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true? Americans who invest in the United States earn the same rate of return as Germans who attempt covered interest arbitrage. Americans who invest in the United States earn the same rate of return as Germans who invest in Germany A and B None of the above Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.

None of the above

Which of the following is true according to the text? None of the above. The absolute forecast error as a percentage of the realized value is a good measure to use in detecting a forecast bias. The forecast bias of a currency rarely shifts over time. Forecasting errors are smaller when focused on longer term periods.

None of the above.

Which of the following is true? Forecast errors cannot be negative. None of the above. Forecast errors are negative when the forecasted rate exceeds the realized rate. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.

None of the above.

Due to the risks involved in international business, firms should: only consider international business in major countries. maintain international business to no more than 35% of total business. maintain international business to no more than 20% of total business. None of these are correct.

None of these are correct.

Eurobonds: None of these are correct. can be issued only by European firms AND can be sold only to European investors. can be sold only to European investors. can be issued only by European firms.

None of these are correct.

The North American Free Trade Agreement (NAFTA) increased restrictions on: trade between Canada and Mexico. trade between Canada and the United States direct foreign investment in Mexico by U.S. firms. None of these are correct.

None of these are correct.

The U.S. dollar is not accepted as a medium of exchange in: None of these are correct. in any Latin American countries. industrialized countries outside the United States. in Eastern European countries where foreign exchange restrictions exist.

None of these are correct.

The United States typically has a balance-of-trade surplus in its trade with ____. None of these are correct. China AND Japan Japan China

None of these are correct.

Which of the following is true regarding forecast errors? B and C Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems. Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries. Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency.

Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems.

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations. True False

Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation? Purchase call option. Sell dollars forward. Purchase put option. Buy dollars forward.

Purchase call option.

Assume that the international Fisher effect (IFE) holds between the United States and the United Kingdom. The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7 percent, and the U.S. interest rate is 7 percent. What does this say about real interest rates expected by British investors? IFE doesn't hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal. Real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors. Real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors. Real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.

Real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.

____ represents aid, grants, and gifts from one country to another. The capital account Secondary income The balance of payments The balance of trade Primary income

Secondary income

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur? Spot rate of peso decreases; forward rate of peso increases. Spot rate of peso increases; forward rate of peso increases. Spot rate of peso decreases; forward rate of peso decreases. Spot rate of peso increases; forward rate of peso decreases.

Spot rate of peso increases; forward rate of peso decreases.

A balance-of-trade deficit indicates an excess of imports over exports. False True

A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. True False

A currency futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. True False

A currency's liquidity can affect the extent to which speculation can impact the currency's value. False True

A decentralized management style results in relatively high agency costs for an MNC. False True

If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and the spot rate will provide similar forecasts. False True

If a publicly traded MNC's managers make poor decisions that reduce its value, that may encourage other firms to acquire the MNC. False True

If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging. True False

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws. True False

If markets were perfect, then labor and other costs of production would be easily transferable. False True

If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively. False True

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified. True False

If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low. False True

Imperfect markets reflect conditions under which factors of production are immobile. True False

In general, common-law countries such as the United States, Canada, and the United Kingdom allow for more legal protection of shareholders than civil-law countries such as France and Italy. True False

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date. True False

Inflation and interest rate differentials between the United States and foreign countries are examples of variables that could be used in fundamental forecasting. True False

Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market. True False

Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country. True False

Large commercial banks play a major role in the international money market by accepting short-term deposits in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies. True False

Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries. True False

Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits. False True

MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast. True False

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. True False

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually. False True

One form of exposure to political risk is terrorism. True False

One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems. False True

Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries. False True

Outsourcing is the process of subcontracting to a third party in another country to provide supplies or services that were previously obtained internally. True False

Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount. True False

Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. True False

Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items. True False

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable. False True

The J-curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved. False True

The LIBOR varies among currencies because the market supply of and the demand for funds vary among currencies. False True

The Sarbanes-Oxley Act (SOX), which was enacted in 2002, required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors. False True

The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm. False True

The VaR method presumes that the distribution of exchange rate movements is normal. False True

The World Bank frequently enters into cofinancing agreements, under which it joins with official aid agencies, export credit agencies, or commercial banks in providing financing. False True

The World Trade Organization was established to provide a forum for multilateral trade negotiations and to settle trade disputes. True False

The ask quote is the price at which a bank offers to sell a currency. False True

The balance of payments is a summary of all transactions between domestic and foreign residents for a specific country over a specified period of time. False True

The closer graphical points are to the perfect forecast line, the better the forecast. True False

The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration. True False

The goal of a multinational corporation (MNC) is the maximization of shareholder wealth. False True

The government enforcement of securities laws varies among countries. False True

The highest amount a buyer of a call or a put option can lose is the exercise price. False True

The ideal currency for short-term deposits by an MNC will exhibit a high interest rate and appreciate over the investment period. True False

The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources. True False

The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent. True False

The international money market is frequently accessed by MNCs for short-term investment and financing needs, while longer-term financing needs are met in the international credit market or the international bond market and in international stock markets. True False

The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula True False

The parent of an MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. True False

The potential forecast error is larger for currencies that are more volatile. True False

The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account. False True

The strike price on a currency option is also known as the exercise price. True False

The value of financial assets transferred across country borders by people who move to a different country is included in the balance of payments in the capital account. True False

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised. True False

The yield curve for the United States normally has an upward slope, meaning that the annualized interest rate is higher for longer terms to maturity False True

To hedge a receivables position with a currency option hedge, an MNC would buy a put option. False True

Two methods for assessing exchange rate volatility are to use the volatility of historical exchange rate movements and to derive the exchange rate's implied standard deviation from the currency option pricing model. True False

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins. True False

Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate. False True

Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold. True False

Under the product cycle theory, foreign demand can be initially satisfied by exporting. True False

Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade. False True

When investors engage in the "carry trade," they attempt to capitalize on the difference in interest rates between two countries by borrowing a currency with a low interest rate and investing the funds in a currency with a high interest rate. True False

When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors. True False

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency. False True

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency. False True

According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country, and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate. True False

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate. True False

Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge. False True

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted. True False

If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today's exchange rates. False True

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts, and those currencies would be expected to depreciate. True False

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure. True False

If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets. False True

In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries. False True

Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount True False

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts. False True

Research indicates that deviations from purchasing power parity (PPP) are less pronounced over the long run. False True

Since earnings can affect stock prices, many MNCs are concerned about translation exposure. False True

Some MNCs are subject to economic exposure without being subject to transaction exposure. False True

The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP). True False

The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically. False True

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price. True False

The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes. False True

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward True False

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD): PCFt = a0 + a1et + mt where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results: Regression Coefficient (a1) Regression Coefficient (a1) Currency Earlier Subperiod Recent Subperiod Australian dollar (A$) -.80 .10 Sudanese dinar (SDD) .20 .25 Based on these results, which of the following statements is probably not true? All of the above are true. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.

The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.

Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance-of-trade position (increase its exports or reduce its imports)? The government could require firms to engage in outsourcing. All of these are mentioned. The government could provide subsidies to importers. The government could attempt to reduce its home currency's value.

The government could attempt to reduce its home currency's value.

Which of the following is NOT likely to represent a strategy by the government of Country X to reduce its balance-of-trade deficit with Country Y? The government of Country X removes a tariff on goods imported from Country Y. The government of Country X eliminates environmental restrictions. The government of Country X provides tax breaks to firms in specific industries. The government of Country X subsidizes firms in its country to facilitate dumping.

The government of Country X removes a tariff on goods imported from Country Y

Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true? The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.

The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.

Which of the following is not true about syndicated loans? A borrower that receives a syndicated loan incurs various fees besides the interest rate. All of the above are true The loans are provided by a group of banks to a borrower. The loans are only denominated in U.S. dollars.

The loans are only denominated in U.S. dollars.

Which of the following is not mentioned in the text as a form of international arbitrage? Transactional arbitrage Triangular arbitrage Locational arbitrage Covered interest arbitrage All of the above are mentioned in the text as forms of international arbitrage.

Transactional arbitrage

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate False True

True

Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised. True False

True

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage False True

True

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. False True

True

The choice of a basic versus a conditional option depends on expectations about the currency's exchange rate over the period of concern. False True

True

The yield curve of every country has its own unique shape True False

True

When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty. False True

True

Which of the following is true? Non-U.S. firms may desire to issue bonds in the United States due to less regulation there. Non-U.S. firms may desire to issue bonds in the United States due to less regulation there AND U.S. firms may desire to issue bonds in the United States due to less regulation there. U.S. firms may desire to issue bonds in the United States due to less regulation there. U.S. firms may desire to issue bonds in non-U.S. markets due to less regulation in some other countries.

U.S. firms may desire to issue bonds in non-U.S. markets due to less regulation in some other countries.

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate: U.S. investors could possibly benefit from covered interest arbitrage British investors could possibly benefit from covered interest arbitrage. neither U.S. nor British investors could benefit from covered interest arbitrage. A and B

U.S. investors could possibly benefit from covered interest arbitrage

Assume the U.S. interest rate is 2 percentage points higher than the Swiss rate, and the forward rate of the Swiss franc has a 4 percent premium. Given this information: A and B Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the United States. none of the above

U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the United States.

Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then: U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States. U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States.

U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States.

If the U.S. dollar appreciates, an MNC's: interest owed on foreign funds borrowed will probably increase. U.S. sales will probably decrease. all of the above exports denominated in U.S. dollars will probably increase. exports denominated in foreign currencies will probably increase.

U.S. sales will probably decrease.

Which of the following is not true regarding interest rate parity (IRP)? When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount. All of the above are true. When interest rate parity holds, covered interest arbitrage is not possible. When covered interest arbitrage is not feasible, interest rate parity must hold.

When covered interest arbitrage is not feasible, interest rate parity must hold.

Assume that an MNC purchases a foreign building, and then leases the building to another party and allows that party to operate the business in the building for 30 years if the party follows standards set by the MNC. This process is referred to as: franchising exporting a licensing agreement a foreign acquisition

a foreign acquisition

Assume the Canadian dollar is equal to $.88 and the Peruvian nuevo sol is equal to $.35. The value of the Peruvian nuevosol in Canadian dollars is: about .3977 Canadian dollars. about 2.51 Canadian dollars. about 2.36 Canadian dollars. about .3621 Canadian dollars.

about .3977 Canadian dollars.

Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid/ask percentage spread is: about 4.17%. about 4.03%. about 4.26%. about 4.44%.

about 4.26%.

Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid/ask percentage spread is: about 4.43%. about 4.88%. about 4.99%. about 4.65%.

about 4.65%.

Four MNCs generate the same level of sales. The MNC that ______________________would likely have the most direct foreign investment. produces and sells its products locally acquires a foreign firm that produces most of its products to be sold in that foreign country exports all of its products imports products from unrelated firms in other countries and sells them locally

acquires a foreign firm that produces most of its products to be sold in that foreign country

Which of the following is not a way in which agency problems can be reduced through corporate control? monitoring by large shareholders acquisition of a foreign subsidiary threat of hostile takeover executive compensation

acquisition of a foreign subsidiary

A country's net outflow of funds ____ its interest rates, and ____ its economic conditions. affects; does not affect affects; affects does not affect; does not affect does not affect; affects

affects; affects

If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements. all of the above semistrong-form strong-form weak-form

all of the above

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist? all of the above transaction costs differential tax laws political risk

all of the above

Which of the following could reduce agency problems for an MNC? a. stock options as managerial compensation b. hostile takeover threat c. investor monitoring d. all of the above are forms of corporate control that could reduce agency problems for an MNC.

all of the above are forms of corporate control that could reduce agency problems for an MNC.

Which of the following is not mentioned in the text as a factor affecting exchange rates? relative interest rates relative inflation rates government controls expectations all of the above are mentioned in the text as factors affecting exchange rates.

all of the above are mentioned in the text as factors affecting exchange rates.

Among the reasons that purchasing power parity (PPP) does not consistently occur are: exchange rates are affected by national income differentials and government controls. exchange rates are affected by interest rate differentials. supply and demand may not adjust if no substitutable goods are available. all of the above are reasons that PPP does not consistently occur.

all of the above are reasons that PPP does not consistently occur.

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: all of the above. transaction exposure. economic exposure. translation exposure.

all of the above.

Which of the following will probably NOT result in an increase in a country's current account balance (assuming everything else remains constant)? a decrease in the country's national income level an appreciation of the country's currency All of these will result in an increased current account balance. a decrease in the country's rate of inflation an increase in government restrictions in the form of tariffs or quotas

an appreciation of the country's currency

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____. appreciate; 2 percent appreciate; 1 percent appreciate; 3 percent depreciate; 2 percent depreciate; 3 percent

appreciate; 2 percent

Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. appreciate; depreciate depreciate; appreciate depreciate; depreciate remain stable; appreciate appreciate; appreciate

appreciate; depreciate

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of: information about interest rates is needed to answer this question. appreciation of yen's value over the next year. no change in yen's value over the next year. depreciation of yen's value over the next year.

appreciation of yen's value over the next year.

Eurobonds: typically carry several protective covenants. are usually issued in bearer form. are usually issued in bearer form AND typically carry several protective covenants. cannot contain call provisions.

are usually issued in bearer form.

An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries? assembly line production development of more sophisticated computer technology specialized professional services nuclear missile programs

assembly line production

For an MNC, agency costs are typically: a. nonexistent b. larger than agency costs of a small purely domestic firm. c. smaller than agency costs of a small purely domestic firm. d. the same as agency costs of a small purely domestic firm.

b. larger than agency costs of a small purely domestic firm.

The commonly accepted goal of an MNC is to: a. maximize short-term earnings. b. maximize shareholder wealth. c. minimize risk. d. A and C. e. maximize international sales.

b. maximize shareholder wealth.

With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____. a. shareholder wealth; short-term earnings b. shareholder wealth; shareholder wealth c. short-term earnings; sales volume d. short-term earnings; shareholder wealth

b. shareholder wealth; shareholder wealth

The ____ is the difference between exports and imports. capital account current account balance on goods and services balance of trade balance of payments

balance of trade

The primary component of the current account is the: balance of trade. balance of gifts. balance of grant payments. balance of aid payments.

balance of trade.

Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will: be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.

benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.

Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will: be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.

If companies cannot rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds. foreign exchange bond Money Derivative

bond

Which of the following operations benefits from appreciation of the firm's local currency? receiving earnings dividends from foreign subsidiaries exporting to foreign countries borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. purchasing supplies locally rather than overseas

borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.

Which of the following is an example of triangular arbitrage initiation? buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20 buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20 buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask converting funds to a foreign currency and investing the funds overseas

buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve: Locational arbitrage is not possible in this case. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.

buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

The International Development Association was established to promote economic development: by providing low-interest-rate loans (below-market rates) to poor nations. in Asia through grants to businesses. through the private sector by providing loans to corporations and investing in their stock. by providing nonsubsidized loans (at market interest rates) to governments and their agencies.

by providing low-interest-rate loans (below-market rates) to poor nations.

The World Bank was established to reduce poverty and promote economic development: by providing nonsubsidized loans (at market interest rates) to governments and their agencies. by providing low-interest-rate loans (below-market rates) to poor nations. in Asia through grants to businesses.

by providing nonsubsidized loans (at market interest rates) to governments and their agencies.

Direct foreign investment into the United States represents a ____. trade outflow capital inflow trade inflow capital outflow

capital inflow

If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and the spot rate will provide ____ forecasts. close to zero; similar close to zero; very different substantial; similar substantial; very different

close to zero; similar

When using ____, funds are typically tied up for a significant period of time B and C covered interest arbitrage locational arbitrage triangular arbitrage

covered interest arbitrage

Points below the IRP line represent situations where: covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. covered interest arbitrage is feasible for neither domestic nor foreign investors. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.

covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.

Points above the IRP line represent situations where: covered interest arbitrage is feasible for neither domestic nor foreign investors. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.

covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

The process by which higher credit risk in one country is transmitted to another country is called: credit contagion. .intermediation interest rate risk. negative cointegration

credit contagion.

When obtaining a loan, the risk premium depends on the: risk-free interest rate of the borrower. credit risk of the borrower. borrower's stock price. lender's stock price.

credit risk of the borrower.

A high home inflation rate relative to other countries would ____ the home country's current account balance, other things being equal. High growth in the home income level relative to other countries would ____ the home country's current account balance, other things being equal. increase; increase decrease; decrease increase; decrease decrease; increase

decrease; decrease

According to the "J-curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance. increase; decrease decrease; increase increase; increase

decrease; increase

Recently, the U.S. experienced an annual balance of trade representing a ____. large surplus (exceeding $100 billion) level of zero small surplus deficit

deficit

Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____. depreciate by .8 percent; tomorrow appreciate by .8 percent; today appreciate by .8 percent; tomorrow depreciate by .8 percent; today

depreciate by .8 percent; tomorrow

Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward. depreciate; buying appreciate; buying appreciate; selling depreciate; selling

depreciate; selling

Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while Jensen establishes the new subsidiary and ____ when the subsidiary starts operations. appreciates; appreciates depreciates; depreciates depreciates; appreciates appreciates; depreciates

depreciates; appreciates

Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of: appreciation in the Australian dollar's value over the next year. information on future interest rates is needed to answer this question. no change in the Australian dollar's value over the next year. depreciation in the Australian dollar's value over the next year.

depreciation in the Australian dollar's value over the next year.

Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value? lower Mexican interest rates depreciation of the Mexican peso a weaker Mexican economy appreciation of the Mexican peso

depreciation of the Mexican peso

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of: depreciation of the pound's value over the next year. not enough information to answer this question. appreciation of the pound's value over the next year. no change in the pound's value over the next year.

depreciation of the pound's value over the next year.

As a result of the Smithsonian Agreement, the U.S. dollar was: revalued (upward) relative to major currencies. the currency to be used by all countries as a medium of exchange for international trade. forced to be freely floating relative to all currencies without any boundaries. devalued relative to major currencies.

devalued relative to major currencies.

Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation? franchising direct foreign investment licensing international trade

direct foreign investment

Which of the following is a key component that determines a country's primary income (within the country's current account)? tax rates direct foreign investment gifts international trade

direct foreign investment

The primary income component in a country's current account may reflect income received due to: direct foreign investment. grants. gifts. aid.

direct foreign investment.

A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation. direct; direct indirect; direct cannot be answered without more information indirect; indirect direct; indirect

direct; indirect

The forward market: for euros is very illiquid. does not exist for some currencies. None of these are correct. for currencies of Eastern European countries is very liquid.

does not exist for some currencies.

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____. the foreign currency; United States dollars; United States the foreign currency; foreign country dollars; foreign country

dollars; foreign country

An increase in the current account deficit will place ____ pressure on the home currency value, other things being equal. no downward upward or downward (depending on the size of the deficit) upward

downward

Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from this covered interest arbitrage activity? upward pressure on the euro's interest rate downward pressure on the euro's spot rate downward pressure on the euro's forward rate downward pressure on the U.S. interest rate

downward pressure on the euro's forward rate

When conducting international business, firms generally face the most risk when they: make acquisitions of existing operations AND establish new subsidiaries. establish new subsidiaries. engage of international trade. engage in franchising. make acquisitions of existing operations.

engage in franchising.

MNCs can improve their internal control process by all of the following, EXCEPT: using a system that checks internal data for unusual discrepancies. ensuring that all data are reported consistently among subsidiaries. establishing a centralized database of information. ensuring that the MNC always borrows from countries where interest rates are lowest.

ensuring that the MNC always borrows from countries where interest rates are lowest.

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect. greater than less than answer is dependent on whether the forward rate has a discount or premium equal to

equal to

Which of the following is NOT one of the more common methods used by MNCs to improve their internal control process? speeding the process by which all departments and all subsidiaries have access to the data that they need All of these are common methods used by MNCs to improve their internal control process. establishing a centralized database of information ensuring that all data are reported consistently among subsidiaries making executives more accountable for financial statements by personally verifying their accuracy

establishing a centralized database of information

According to the text, the average foreign exchange trading around the world ____ per day. equals about $700 billion exceeds $4 trillion equals about $400 billion equals about $200 billion

exceeds $4 trillion

The term "dumping" refers to the: removal of foreign subsidiaries by the host government. sale of junk bonds to foreign countries. exporting of goods at prices below cost. exporting of goods that do not meet quality standards.

exporting of goods at prices below cost.

Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency. favorably; stronger not; stronger not; weaker B and D favorably; weaker

favorably; stronger

Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency. favorably; weaker not; weaker favorably; stronger not; stronger

favorably; weaker

Monson Co., based in the United States, exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments. none of the above lower; not to hedge higher; not to hedge higher; to hedge

higher; not to hedge

Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCFt = a0 + a1et + mt where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of 2. This indicates that: if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%. none of the above

if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.

Which of the following theories identifies the nontransferability of resources as a reason for international business? None of these are correct. theory of comparative advantage product cycle theory imperfect markets theory

imperfect markets theory

If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments). remain unaffected decrease decrease AND remain unaffected is possible increase

increase

An increase in the use of quotas is expected to: have no impact on the country's current account balance unless other governments retaliate. reduce the country's current account balance, if other governments do not retaliate. increase the volume of a country's trade with other countries. increase the country's current account balance, if other governments do not retaliate.

increase the country's current account balance, if other governments do not retaliate.

. The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____. a. decrease; appreciate b. increase; appreciate c. decrease; depreciate d. increase; depreciate

increase; appreciate

Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$). increase; reduce; appreciation reduce; increase; depreciation reduce; increase; appreciation reduce; increase; appreciation

increase; reduce; appreciation

Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____. increase; remain unchanged decrease; increase increase; decrease decrease; remain unchanged

increase; remain unchanged

Over the last several years, international trade has generally: increased for most major countries. stayed about constant for most major countries. decreased for most major countries. increased for about half the major countries and decreased for the others.

increased for most major countries.

Which of the following is NOT a result of the North American Free Trade Agreement (NAFTA)? increased exports by U.S. firms to Mexico increased imports by the United States from Mexico increased trade between the United States and Central American countries increased establishment of subsidiaries in Mexico by U.S. firms

increased trade between the United States and Central American countries

The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time. increased; decreased decreased; decreased decreased; increased increased; increased

increased; decreased

You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$. indirect; 142.86 direct; 150 indirect; 150 indirect; 0 direct; 142.86

indirect; 142.86

Which of the following theories can be assessed using data that exists at one specific point in time? A and B purchasing power parity (PPP) international Fisher effect (IFE) interest rate parity (IRP)

interest rate parity (IRP)

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries? purchasing power parity (PPP) interest rate parity (IRP) triangular arbitrage international Fisher effect (IFE)

interest rate parity (IRP)

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $.62 Spot rate of Swiss franc = $.60 Given this information: interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on British pounds = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Given this information: interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

Which of the following is NOT mentioned in the text as an additional risk resulting from international business? interest rate risk political risk exposure to foreign economies exchange rate fluctuations

interest rate risk

Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries? interest rate parity (IRP) international Fisher effect (IFE) relative form of PPP absolute form of PPP

international Fisher effect (IFE)

An MNC's short-term financing decisions are satisfied in the ____ market, while its medium-term debt financing decisions are satisfied in the ____ market. international money; international credit international money; international stock international money; international bond international bond; international credit international credit; international money

international money; international credit

The least risky method by which firms conduct international business is: licensing the establishment of new subsidiaries acquisitions of existing operations international trade franchising

international trade

Which of the following does NOT constitute a form of direct foreign investment? establishment of new foreign subsidiaries acquisitions of existing operations franchising international trade joint ventures

international trade

Which of the following operations benefit(s) from depreciation of the firm's local currency? A and B purchasing foreign supplies borrowing in a foreign country and converting the funds to the local currency prior to the depreciation investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency

investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: is due to their inflation differentials. C and D follows their exchange rate movement. is constant over time. is zero.

is due to their inflation differentials.

Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____. a specialized sales or service strategy; its technology a specialized sales or service strategy; a specialized sales or service strategy its technology; an initial investment its technology; its technology its technology; a specialized sales or service strategy

its technology; a specialized sales or service strategy

The main participants in the international money market are: small European firms needing European currencies for international trade. consumers. large corporations. small firms.

large corporations.

In recent years, the United States has had a relatively (compared to other countries) ____ balance of trade ____ with China. small; surplus small; deficit large; deficit large; surplus

large; deficit

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: larger will be the forward premium of the foreign currency. smaller will be the forward discount of the foreign currency. larger will be the forward discount of the foreign currency. smaller will be the forward premium of the foreign currency.

larger will be the forward discount of the foreign currency.

Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the: larger will be the forward premium of the foreign currency. smaller will be the forward premium of the foreign currency. smaller will be the forward discount of the foreign currency. larger will be the forward discount of the foreign currency.

larger will be the forward premium of the foreign currency.

Forward markets for currencies of developing countries are: prohibited. less liquid than markets for currencies of developed countries. only available for use by government agencies. more liquid than markets for currencies of developed countries.

less liquid than markets for currencies of developed countries.

In general, stock markets allow for more governance and attract more investors when they have all of the following except: more enforcement of the laws. less stringent accounting requirements. more voting rights for shareholders. more legal protection for shareholders.

less stringent accounting requirements.

Without international capital flows, there would be ____ funding available in the United States across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level. less; lower more; higher more; lower less; higher

less; higher

Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co? establishment of a Japanese subsidiary joint venture licensing partial acquisition of an existing Japanese firm

licensing

The interest rate on the syndicated loan depends all of the following except: creditworthiness of the borrower. currency denominating the loan. maturity of the loan. loan provisions set by the International Monetary Fund

loan provisions set by the International Monetary Fund

Due to ____, market forces should realign the spot rate of a currency among banks. orward realignment arbitrage covered interest arbitrage locational arbitrage triangular arbitrage

locational arbitrage

Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____. high; large low; small high; small low; large

low; large

According to the text, international trade (exports plus imports combined) as a percentage of GDP is: lower in the United States than in European countries. about the same in the United States as in European countries. higher in the United States than in European countries. higher in the United States than in about half the European countries, and lower in the United States than in the others.

lower in the United States than in European countries.

The General Agreement on Tariffs and Trade (GATT) accord of 1993 called for: increased trade restrictions outside North America. lower trade restrictions around the world. uniform worker health laws.

lower trade restrictions around the world.

Compared to other methods of international business, international trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions. higher; lower lower; lower lower; higher higher; higher

lower; lower

The Sarbanes-Oxley Act improved corporate governance of MNCs because it: made executives more accountable for verifying financial statements. eliminated stock options as a form of compensation. tied executive compensation to firm performance. placed a limit on the amount of funds that managers can spend.

made executives more accountable for verifying financial statements.

Which of the following forecasting techniques would be most likely to use today's spot exchange rate of the euro to forecast the euro's future exchange rate? market-based forecasting fundamental forecasting technical forecasting mixed forecasting

market-based forecasting

The goal of an MNC is to: maximize shareholder wealth. minimize taxes on funds remitted from foreign subsidiaries. establish subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. maximize the social benefits resulting from actions such as the employment of foreign managers.

maximize shareholder wealth.

The international credit market primarily concentrates on: short-term lending (less than one year). placing newly issued stock in foreign markets. providing an exchange of foreign currencies for firms that need them. medium-term lending. credit cards for individuals.

medium-term lending.

As a result of the European Union, restrictions on exports between ____ were reduced or eliminated. member countries and the United States None of these are correct. member countries and European nonmembers member countries

member countries

Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in the firm's stock price (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod. negative; negative negative; positive positive; negative positive; positive

negative; negative

Given a home country and a foreign country, purchasing power parity suggests that: A and B none of the above the nominal interest rates of both countries will be the same. the inflation rates of both countries will be the same.

none of the above

Given a home country and a foreign country, the international Fisher effect (IFE) suggests that: the nominal interest rates of both countries are the same. the inflation rates of both countries are the same. the exchange rates of both countries will move in a similar direction against other currencies. none of the above

none of the above

A firm produces products for which substitute products are produced in all countries. Appreciation of the firm's local currency should: none of the above increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. increase the firm's exports denominated in the local currency. increase the returns earned on the firm's foreign bank deposits. increase local sales as it reduces foreign competition in local markets.

none of the above

The World Bank's Multilateral Investment Guarantee Agency (MIGA): provides loans to developing countries. offers various forms of exchange rate risk insurance. offers various forms of export insurance. offers various forms of import insurance. offers various forms of political risk insurance.

offers various forms of political risk insurance.

European currency options can be exercised ____; American currency options can be exercised ____. any time up to the expiration date; any time up to the expiration date only on the expiration date; any time up to the expiration date only on the expiration date; only on the expiration date any time up to the expiration date; only on the expiration date

only on the expiration date; any time up to the expiration date

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as: at the money. in the money. out of the money.

out of the money.

Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft - 1 + mt, where St is the spot rate of the yen in year t and Ft - 1 is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate. overestimated underestimated correctly estimated none of the above

overestimated

If a particular currency is consistently declining substantially over time, then a market-based forecast of a currency in a developed country will usually have: underestimated the future exchange rates over time. forecasted future exchange rates accurately. overestimated the future exchange rates over time. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

overestimated the future exchange rates over time.

To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency. none of the above payable; purchase receivable; purchase payable; sell

payable; purchase

Eurodollar deposits consisting of the oil revenues of oil-producing countries are known as: petro-euros. petro deposits. petrodollars. euros.

petrodollars.

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a ____ of ____ percent. premium; 3.65 discount; 3.65 premium; 2.73 discount; 2.73

premium; 2.73

Assume that interest rate parity holds, and the euro's interest rate is 9 percent while the U.S. interest rate is 12 percent. Then the euro's interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity. premium; decrease discount; decrease premium; increase discount; increase

premium; decrease

When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations will be based on the: closing prices in the United States during the previous day. closing prices in Canada during the previous day. prevailing prices in locations where the foreign exchange markets are already open. officially set by central banks before the U.S. market opens.

prevailing prices in locations where the foreign exchange markets are already open.

Which of the following theories suggests that firms seek to penetrate new markets over time? None of these are correct. theory of comparative advantage imperfect markets theory product cycle theory

product cycle theory

According to the text, licensing allows a firm to: None of these are correct. export without government restrictions. provide its technology for a fee. import without being subject to government restrictions.

provide its technology for a fee.

If a U.S. firm will need C$200,000 in 90 days to pay for imports from Canada and it wishes to avoid the risk from exchange rate fluctuations, it could: purchase a 90-day forward contract on Canadian dollars. sell a 90-day forward contract on Canadian dollars. purchase Canadian dollars 90 days from now at the spot rate. sell Canadian dollars 90 days from now at the spot rate.

purchase a 90-day forward contract on Canadian dollars.

A forward contract can be used to lock in the ____ of a specified currency at a future point in time. purchase price AND sale price sale price purchase price None of these are correct.

purchase price AND sale price

Which of the following is an example of direct foreign investment? exporting to a country investing directly (without brokers) in foreign stocks purchasing existing companies in a country establishing licensing arrangements in a country

purchasing existing companies in a country

Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries? purchasing power parity (PPP) triangular arbitrage international Fisher effect (IFE) interest rate parity (IRP)

purchasing power parity (PPP)

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 1. Therefore: purchasing power parity underestimated the exchange rate change during the period under examination. purchasing power parity will overestimate the exchange rate change of the British pound in the future. purchasing power parity overestimated the exchange rate change during the period under examination. purchasing power parity holds.

purchasing power parity holds.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 2. Therefore: purchasing power parity holds. purchasing power parity overestimated the exchange rate change during the period under examination . purchasing power parity will overestimate the exchange rate change of the British pound in the future. purchasing power parity underestimated the exchange rate change during the period under examination.

purchasing power parity underestimated the exchange rate change during the period under examination.

The following regression was conducted for the exchange rate of the British pound (BP): Regression results indicate that a0 = 0 and a1 = 2. Therefore, purchasing power parity underestimated the exchange rate change during the period under examination. purchasing power parity overestimated the exchange rate change during the period under examination. purchasing power parity holds. purchasing power parity will overestimate the exchange rate change of the British pound in the future.

purchasing power parity underestimated the exchange rate change during the period under examination.

If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same). reduce increase All of these are equally possible. have no impact on

reduce

Because there are a variety of factors in addition to inflation that affect exchange rates, this will: increase the probability the IFE will hold. increase the probability that PPP will hold. reduce the probability that PPP will hold. B and C

reduce the probability that PPP will hold.

Because there are sometimes no substitutes for traded goods, this will: reduce the probability that PPP will hold. increase the probability the IFE will hold. increase the probability that PPP will hold. B and C

reduce the probability that PPP will hold.

Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$). reduce; increase; depreciation increase; reduce; depreciation reduce; increase; appreciation reduce; increase; appreciation

reduce; increase; depreciation

Assume the United States has a balance-of-trade surplus with the country of Thor. When individuals in Thor without permission manufacture video games and DVDs that look almost exactly like the original products produced in the United States and other countries, they ____ the U.S. balance-of-trade surplus with Thor. This activity is called ____. increase; flipping increase; piracy reduce; flipping reduce; piracy

reduce; piracy

A syndicated loan: represents a loan by a single bank to aterm-173 syndicate of corporations. represents a loan by a single bank to a syndicate of corporations AND represents a loan by a single bank to a syndicate of country governments. represents a direct loan by a syndicate of oil-producing exporters to a less developed country. represents a loan by a group of banks to a borrower. represents a loan by a single bank to a syndicate of country governments.

represents a loan by a group of banks to a borrower.

If a U.S. firm is receiving 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could: purchase a 90-day forward contract on euros. sell a 90-day forward contract on euros. sell euros 90 days from now at the spot rate. purchase euros 90 days from now at the spot rate.

sell a 90-day forward contract on euros.

The international money market is primarily served by: several large banks that accept deposits and provide loans in various currencies. the governments of European countries, which directly intervene in foreign currency markets. government agencies such as the International Monetary Fund that promote development of countries. small banks that convert foreign currency for tourists and business visitors.

several large banks that accept deposits and provide loans in various currencies.

The international money market primarily concentrates on: long-term lending. placing bonds with investors. placing newly issued stock in foreign markets. short-term lending (one year or less). medium-term lending.

short-term lending (one year or less).

Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X: should exhibit a premium. B or C should be zero (i.e., it should equal its spot rate). should exhibit a discount.

should exhibit a discount.

Futures contracts are typically ____; forward contracts are typically ____. sold on an exchange; sold in an over-the-counter market sold on an exchange; sold on an exchange sold in an over-the-counter market; sold on an exchange offered by commercial banks; offered by commercial banks

sold on an exchange; sold in an over-the-counter market

If the international Fisher effect (IFE) did not hold based on historical data, this would suggest that: most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments. some corporations with excess cash could lock in a guaranteed higher return on future foreign short-term investments. some corporations with excess cash could have generated profits on average from covered interest arbitrage.

some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.

If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements. all of the above none of the above technical forecast technique

technical forecast technique

According to the IFE, if British interest rates exceed U.S. interest rates: the British inflation rate will decrease. the British pound will depreciate against the dollar. the British pound's value will remain constant. the forward rate of the British pound will contain a premium. today's forward rate of the British pound will equal today's spot rate.

the British pound will depreciate against the dollar.

Which currency is used the most to denominate Eurobonds? the British pound the Japanese yen the U.S. dollar the Swiss franc

the U.S. dollar

Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs: the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63 Bank D $1.58 $1.60 As locational arbitrage occurs: the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.

the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

The demand for U.S. exports tends to increase when: economic growth in foreign countries decreases. U.S. inflation rises. the currencies of foreign countries strengthen against the dollar. None of these are correct.

the currencies of foreign countries strengthen against the dollar.

The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on: the expected percentage change in the currency for the next day. the standard deviation of the daily percentage changes in the currency over a previous period. the current level of interest rates. the confidence level used.

the current level of interest rates.

The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on: the current level of interest rates. the standard deviation of the daily percentage changes in the currency over a previous period. the confidence level used. the expected percentage change in the currency for the next day.

the current level of interest rates.

The real cost of hedging payables with a forward contract equals: the dollar cost of hedging minus the dollar cost of not hedging. the dollar cost of not hedging divided by the dollar cost of hedging. the dollar cost of not hedging minus the dollar cost of hedging. the dollar cost of hedging divided by the dollar cost of not hedging.

the dollar cost of hedging minus the dollar cost of not hedging.

According to the international Fisher effect (IFE): the exchange rate-adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment. the percentage change in the foreign spot exchange rate will be negative if the foreign interest rate is lower than the local interest rate. the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment. the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.

the exchange rate-adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.

Economic exposure refers to: the exposure of a country's economy (specifically GNP) to exchange rate fluctuations. the exposure of a firm's local currency value to transactions between foreign exchange traders. the exposure of a firm's financial statements to exchange rate fluctuations. the exposure of a firm's cash flows to exchange rate fluctuations. the exposure of a firm's international transactions to exchange rate fluctuations.

the exposure of a firm's financial statements to exchange rate fluctuations.

Translation exposure reflects: the exposure of a firm's cash flows to exchange rate fluctuations. the exposure of a firm's international transactions to exchange rate fluctuations. the exposure of a firm's local currency value to transactions between foreign exchange traders. the exposure of a firm's financial statements to exchange rate fluctuations.

the exposure of a firm's financial statements to exchange rate fluctuations.

Transaction exposure reflects: t he exposure of a firm's cash flows to exchange rate fluctuations. the exposure of a firm's financial statements to exchange rate fluctuations. the exposure of a firm's internationall transactions to exchange rate fluctuations. the exposure of a firm's local currency value to transactions between foreign exchange traders.

the exposure of a firm's internationall transactions to exchange rate fluctuations.

According to interest rate parity (IRP): the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.

the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Given a home country and a foreign country, purchasing power parity (PPP) suggests that: the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.

the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and: the inflation differential. the forward discount or premium. the income differential. none of the above

the inflation differential.

Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except: the interest rate in the country of the subsidiary. the proportion of business conducted by the subsidiary. the exchange rate movements of the subsidiary's currency. its accounting method.

the interest rate in the country of the subsidiary.

If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: the average absolute error from forecasting would equal zero. the international Fisher effect (IFE) is supported. the international Fisher effect (IFE) is refuted. covered interest arbitrage is feasible.

the international Fisher effect (IFE) is supported.

The "J-curve" effect describes: the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating. the tendency for exporters to initially reduce the price of goods when their own currency appreciates. the tendency of a country's currency to initially depreciate after the country's inflation rate declines. the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross domestic product.

the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.

The bid/ask spread on an exchange rate can be used to directly determine: how an exchange rate will change. the transaction cost of foreign exchange. the forward premium. the currency option premium.

the transaction cost of foreign exchange.

If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold: the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation. the value of the euro would often appreciate against the dollar. the value of the euro would often depreciate against the dollar. the value of the euro would remain constant most of the time.

the value of the euro would often appreciate against the dollar.

Which of the following theories identifies specialization as a reason for international business? product cycle theory theory of comparative advantage imperfect markets theory None of these are correct.

theory of comparative advantage

The International Finance Corporation was established to promote economic development: by providing nonsubsidized loans (at market interest rates) to governments and their agencies. through the private sector by providing loans to corporations and investing in their stock. in Asia through grants to businesses. by providing low-interest-rate loans (below-market rates) to poor nations.

through the private sector by providing loans to corporations and investing in their stock.

Which of the following is NOT a goal of the International Monetary Fund (IMF)? to promote stability in exchange rate to promote free mobility of capital funds across countries to enhance a country's long-term economic growth via the extension of structural adjustment loans to promote free trad to promote cooperation among countries on international monetary issues

to enhance a country's long-term economic growth via the extension of structural adjustment loans

Which of the following is not one of the major reasons for MNCs to forecast exchange rates? to decide where to borrow at the lowest cost to speculate on exchange rate movements to determine whether to require a subsidiary to remit funds or invest them locally to decide in which foreign market to invest excess cash

to speculate on exchange rate movements

Under FASB 52: translation gains and losses are included in stockholder's equity. translation gains and losses are included in the reported net income. A and B none of the above

translation gains and losses are included in stockholder's equity.

Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar. locational arbitrage covered interest arbitrage forward realignment arbitrage triangular arbitrage

triangular arbitrage

Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity? upward pressure on the Swiss franc's spot rate upward pressure on the U.S. interest rate downward pressure on the Swiss interest rate upward pressure on the Swiss franc's forward rate

upward pressure on the Swiss franc's forward rate

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate and ____ pressure on the pound's forward rate. downward; upward downward; downward upward; downward upward; upward

upward; downward

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____. downward; immediately upward; only after the U.S. inflation surges upward; immediately downward; only after the U.S. inflation surges

upward; immediately

The agency costs of an MNC are likely to be lower if it: scatters its subsidiaries across many foreign countries. scatters its subsidiaries across many foreign countries AND increases its volume of international business. uses a centralized management style. increases its volume of international business. The Sarbanes-Oxley Act improved corporate governance of MNCs because it: made executives more accountable for verifying financial statements. eliminated stock options as a form of compensation. tied executive compensation to firm performance. placed a limit on the amount of funds that managers can spend.

uses a centralized management style.

Which of the following is not a method of forecasting exchange rate volatility? using the absolute forecast error as a percentage of the realized value deriving the exchange rate's implied standard deviation from the currency option pricing model using a time series of volatility patterns in previous periods using the volatility of historical exchange rate movements as a forecast for the future

using the absolute forecast error as a percentage of the realized value

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be: strong, since the country's quoted interest rate would be high relative to the inflation rate. weak, since the country's quoted interest rate would be high relative to the inflation rate. strong, since the country's quoted interest rate would be low relative to the inflation rate. weak, since the country's quoted interest rate would be low relative to the inflation rate.

weak, since the country's quoted interest rate would be low relative to the inflation rate.

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is: weak-form efficient. all of the above. semistrong-form efficient. strong-form efficient.

weak-form efficient.

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: -$.03. none of the above $.08. -$.08. $.05.

$.05.

Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast? $.140 $.226 $.262 $.131 $.174

$.131

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 $.80. The spot rate forecasted for one year ahead is: $.740. $.860. $.752. $.848.

$.752.

The inflation rate in the United States is 3 percent while the inflation rate in Japan is 10 percent. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen have adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be: $0.0076. $0.0070. $0.0073. $0.0066.

$0.0070.

If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium. True False

False

The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be $0.0078. none of the above $0.0111. $0.0082. $0.00492.

$0.0082.

Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the United States at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge? $1,000,830 $1,045,644 $1,000,000 $1,055,602

$1,000,830

Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.60 90-day forward rate of pound = $1.57 3-month deposit rate in U.S. = 3% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? $1,045,600 $1,020,500 $1,116,250 $1,094,230 $1,073,330

$1,020,500

Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.30 90-day forward rate of pound = $1.28 3-month deposit rate in United States = 3% 3-month deposit rate in Great Britain = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? $1,030,000. $1,040,000. none of the above $1,034,000. $1,024,000.

$1,024,000.

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage? $500 $9,804 $2,041,667 $1,639

$1,639

The value of the euro was $1.30 last week. During last week the euro depreciated by 5 percent. What is the value of the euro today? $1.330 $1.30 $1.235 $1.365

$1.235

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25? $1.34 $1.27 $1.23 $1.16

$1.27

The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro? $1.42 $1.16 $1.30 $1.28

$1.30

The spot rate of the British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound? $1.52 $1.37 $1.46 $1.61

$1.46

FAB Corp. will need 200,000 Canadian dollars (C$) in 90 days to cover a payables position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payables position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost? $148,000 $150,000 $144,000 $152,000

$144,000

National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $.55 $.56 Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? $77.64 $197.53 $111.80 $15.43

$15.43

Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? $16,393 $18,219 $14,441 $10,003 $12,063

$16,393

Assume the following information: Quoted Bid Price Quoted Ask Price Value of an Australian dollar (A$) in $ $0.67 $0.69 Value of Mexican peso in $ $.074 $.077 Value of an Australian dollar in Mexican pesos 8.2 8.5 Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy? $6,518 $13,711 $6,133 $2,368

$2,368

Quasik Corp. will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its receivables position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge? $219,000 $222,000 $216,000 $213,000

$216,000

U.S. Jordan 360-day borrowing rate 6% 5% 360-day deposit rate 5% 4% Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)? $224,135 $223,212 $226,269 $224,114

$226,269

Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? -$11,964. $18,219. $36,585. $11,764. $24,390.

$24,390.

Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% Swiss deposit rate for 1 year = 8% Swiss borrowing rate for 1 year = 10% Swiss forward rate for 1 year = $.40 Swiss franc spot rate = $.39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? $238,584 $236,127 $240,000 $234,000

$240,000

Assume the following information: You have $300,000 to invest: The spot bid quote for the euro (€) is $1.08 The spot ask quote for the euro is $1.10 The 180-day forward rate (bid) of the euro is $1.08 The 180-day forward rate (ask) of the euro is $1.10 The 180-day interest rate in the United States is 6% The 180-day interest rate in Europe is 8% Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have after 180 days? $330,000.00 $312,218.20 none of the above $323,888.90 $318,109.10

$318,109.10

Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)? $330,000 $340,000 $325,000 $320,000

$325,000

Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. $336,000 $338,000 $344,000 $360,000 $332,000

$344,000

A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally? $44,100 $46,900 $36,400 $33,600

$36,400

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? $36,400. $44,100. $46,900. $33,600.

$36,400.

U.S. Jordan 360-day borrowing rate 6% 5% 360-day deposit rate 5% 4% Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)? $373,558 $363,019 $377,115 $370,000

$370,000

$47,500

Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage? Triangular arbitrage is not possible in this case. $6,090.13 $5,030.45 $6,053.27

$5,030.45

Assume the following information: You have $900,000 to invest: Current spot rate of Australian dollar (A$) = $.62 180-day forward rate of the Australian dollar = $.64 180-day interest rate in the United States = 3.5% 180-day interest rate in Australia = 3.0% If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? $61,548 $27,000 $31,500 $56,903

$56,903

Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? $579,845. $588,200. $584,245. $583,800. $980,245.

$579,845.

Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30-day forward rate = $.62 $580,000 $590,000 $610,000 $600,000 $630,000

$590,000

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? $7,000,000. none of the above $6,500,000. $7,250,000. $6,875,000.

$6,500,000

Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? $8,556 $10,114 $12,238 $7,067

$7,067

Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____. -$7,500. $0. none of the above $7,500.

$7,500.

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. False True

False

Assume that Parker Co. will receive SF200,000 in 360 days. Assume the following interest rates: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Co. uses a money market hedge, it will receive ____ in 360 days. $92,307 $98,769 $101,904 $96,914 $101,923

$96,914

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States? $995,851 $995,025 $952,381 $943,396

$995,851

You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is: none of the above -$.02. $.02. -$.01. -$.03.

-$.02.

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? -$0.04. -$0.01. $0.01. -$0.03. $0.04.

-$0.01.

Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: -$625.00. -$1,562.50. -$1,250.00. $1,562.50.

-$1,562.50

Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 97.5 percent confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.35. -$1,958 -$4,303 -$7,830 -$5,873

-$5,873

Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07. The spot rate of the euro in 90 days is forecasted to be $1.02. Based on this information, the expected value of the real cost of hedging payables is $____. 25,000 10,700 -107,000 -25,000

-25,000

Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. -5.00 percent -9.00 percent -30.00 percent. none of the above

-9.00 percent

Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds? 2.40. 2.0. none of the above .50. .80.

.50.

The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____. none of the above 1.04 1.03 1.02

1.04

Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date. 39,062.50 48,000 87,062.50 100,000

100,000

Assume the following information: Spot rate today of Swiss franc = $.60 1-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64 Rate on 1-year deposits denominated in Swiss francs = 7% Rate on 1-year deposits denominated in U.S. dollars = 9% From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent. 15.50 11.22 14.13 12.35 5.00

12.35

Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros. 224,000 220,000 200,000 230,000

220,000

The following regression model was estimated to forecast the value of the Indian rupee (INR): INRt = a0 + a1INTt + a2INFt - 1 + mt, where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the United States and India, and INF is the inflation rate differential between the United States and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = -.5; and a2 = .8. Assume that INFt - 1 = 2 percent. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution: Probability Possible Outcome 30% -2% 40% -3% 30% -4% The expected change in the Indian rupee in period t is: none of the above 3.10 percent. 1.70 percent. 3.40 percent. 0.40 percent.

3.40 percent.

Assume that the interest rate offered on pounds is 5 percent and the pound is expected to depreciate by 1.5 percemt. For the international Fisher effect (IFE) to hold between the United Kingdom and the United States, the U.S. interest rate should be ____. 5.68 percent 7.3 percent 3.43 percent 6.5 percent

3.43 percent

The writer of an currency call option is obligated to buy the currency if the option is exercised. True False

False

Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90-day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability $.61 10% $.63 20% $.64 40% $.65 30% The probability that the forward hedge will result in moredollars received than not hedging is: 20 percent. 50 percent. 70 percent. 30 percent. 10 percent.

30 percent.

Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? 6 percent 4 percent 3 percent 2 percent

4 percent

The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD): AUDt = a0 + a1INTt + a2INFt - 1 + mt, where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = -.8; and a2 = .5. Assume that INFt - 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution: Probability Possible Outcome 20% -3% 80% -4% There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____. none of the above 4.5 percent; 5.3 percent 6.1 percent; 4.5 percent 4.5 percent; 6.1 percent

4.5 percent; 5.3 percent

Lorre Co. needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar: Possible Value of Canadian Dollar in 90 Days Probability $0.54 15% 0.57 25% 0.58 35% 0.59 25% The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging? 15 percent 85 percent 40 percent 60 percent

40 percent

You are the treasurer of Montana Corp. and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is: Future Spot Rate Probability $.01035 20% $.01032 20% $.01030 30% $.01029 30% The 90-day forward rate of the Japanese yen is $.01033. What is the probability that the call option will be exercised (assuming Montana purchased it)? 40 percent 20 percent 60 percent 30 percent

40 percent

Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros? 3 percent 5 percent 8 percent 2.78 percent

5 percent

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately: 2.63 percent. 5.55 percent. 4.33 percent. 5.13 percent.

5.13 percent.

Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. Refer to Exhibit 10-2. What is the portfolio standard deviation? none of the above 5.44 percent 3.00% 17.98 percent

5.44 percent

Assume the following information: You have $300,000 to invest: The spot bid quote for the euro (€) is $1.08 The spot ask quote for the euro is $1.10 The 180-day forward rate (bid) of the euro is $1.08 The 180-day forward rate (ask) of the euro is $1.10 The 180-day interest rate in the United States is 6% The 180-day interest rate in Europe is 8% Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation? 7.96 percent; feasible 4.07 percent; not feasible 6.04 percent; feasible 6.04 percent; not feasible 10.00 percent; feasible

6.04 percent; feasible

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? 7.6 percent discount 7.6 percent premium 1.9 percent premium 1.9 percent discount

7.6 percent premium

Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability $.48 10% $.49 60% $.55 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge). none of the above 70 percent 10 percent 30 percent 40 percent

70 percent

Currency options are commonly traded through the ____ system. robot Globex Scope

Globex

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables. True False

True

According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be: 2 percent. -2 percent. 3 percent. 5 percent. 8 percent.

8 percent.

According to the text, research generally supports ____ in foreign exchange markets. strong-form efficiency semistrong-form efficiency A and B weak-form efficiency B and C

A and B

Economic exposure can affect: none of the above purely domestic firms only. A and B MNCs only.

A and B

Which of the following might be used to hedge exposure in the long run? long-term forward contract parallel loan money market hedge A and C

A and C

You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht? A$553.00 A$25,043.48 none of the above A$39.93

A$39.93

When using ____, funds are not tied up for any length of time covered interest arbitrage B and C locational arbitrage triangular arbitrage

B and C

Which of the following reflects a hedge of net payables in British pounds by a U.S. firm? Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. Sell a currency call option in British pounds. Sell pounds forward. A and B Purchase a currency put option in British pounds.

Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.

The purchase of a currency put option would be appropriate for which of the following? Investors who expect to buy a foreign bond in one month. all of the above Corporations that expect to buy foreign currency to finance foreign subsidiaries. Corporations that expect to collect on a foreign account receivable in one month.

Corporations that expect to buy foreign currency to finance foreign subsidiaries.

____ are not a factor that causes currency supply and demand schedules to change. Relative inflation rates Relative interest rates Relative income levels Expectations All of the above are factors that cause currency supply and demand schedules to change.

Expectations

A futures hedge involves taking a money market position to cover a future payables or receivables position. True False

False

A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option. False True

False

A put option essentially represents two swaps of currencies: one swap at the inception of the loan contract and another swap at a specified date in the future. True False

False

A reduction in hedging will probably reduce transaction exposure. True False

False

A straddle involves the purchase of either two call or two put options at the same exercise price. False True

False

Government controls can affect only the supply of a given currency for sale and not the demand. False True

False

Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries. False True

False

If a currency's forward rate exhibits a premium, that currency is forced to depreciate. True False

False

If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge. True False

False

MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration. False True

False

Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits. False True

False

Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. True False

False

The exchange rates of smaller countries are very stable because the market for their currency is very liquid. False True

False

The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission. True False

False

The price at which a currency put option allows the holder to sell a currency is called the settlement price. True False

False

The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium. True False

False

To hedge a payables position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the United States until the payables are due. True False

False

To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures. True False

False

When the real cost of hedging payables is positive, this implies that hedging was more favorable than not hedging. True False

False

In which case will locational arbitrage most likely be feasible? One bank's bid price for a currency is less than another bank's bid price for the currency. One bank's ask price for a currency is greater than another bank's bid price for the currency. One bank's ask price for a currency is less than another bank's ask price for the currency. One bank's bid price for a currency is greater than another bank's ask price for the currency.

One bank's bid price for a currency is greater than another bank's ask price for the currency.

Which of the following is not true regarding options? Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. Options are traded on exchanges, never over-the-counter. All of the above are true. Similar to futures contracts, margin requirements are normally imposed on option traders. Currency options can be classified as either put or call options.

Options are traded on exchanges, never over-the-counter.

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of the British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65 percent premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy? Sell a call option and receive $156,000. Sell a put option and receive $157,000. Sell pounds forward and receive $155,000. Buy a put option and receive $150,000.

Sell pounds forward and receive $155,000.

Which of the following events would most likely result in an appreciation of the U.S. dollar? U.S. inflation is very high. Japan is expected to increase interest rates in the near future. Future U.S. interest rates are expected to decline. The Fed indicates that it will raise U.S. interest rates.

The Fed indicates that it will raise U.S. interest rates.

Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S $ = $.32 Exchange rate of pound in U.S.$ = $1.50 Exchange rate of pound in Singapore dollars = S$4.50 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S $ = $.60 Exchange rate of pound in U.S.$ = $1.50 Exchange rate of pound in Singapore dollars = S$2.6 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate

____ is (are) not a determinant of translation exposure. The locations of foreign subsidiaries The local (domestic) earnings of the MNC The MNC's degree of foreign involvement The accounting methods used

The local (domestic) earnings of the MNC

A money market hedge involves taking a money market position to cover a future payables or receivables position. False True

True

A straddle can only be achieved if the exercise prices of put and call options are the same. True False

True

Because constructing a long straddle in a foreign currency requires payment of two option premiums, the straddle becomes profitable only if the foreign currency appreciates or depreciates substantially. False True

True

Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies. False True

True

Hedgers should buy calls if they are hedging an expected outflow of foreign currency. True False

True

Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate. False True

True

Many MNCs use selective hedging, in which they consider each type of transaction separately. False True

True

Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not convertible into dollars. True False

True

The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased. False True

True

The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging. False True

True

If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____. depreciate; appreciate appreciate; depreciate appreciate; appreciate depreciate; depreciate

appreciate; depreciate

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____ percent appreciated; 5.80 appreciated; 4.00 depreciated; 5.80 depreciated; 4.00

appreciated; 5.80

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro: eurot = b0 + b1INFt - 1 + b2INCt - 1 = .005 + .9INFt - 1 + 1.1INCt - 1 The most recent quarterly percentage change in the inflation differential between the United States and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the United States and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____ percent. appreciation; 3.4 appreciation; 0.7 appreciation; 1.2 depreciation; 3.4

appreciation; 1.2

According to the text, currency volatility levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time. are; are not are; are are not; are not are not; are

are not; are not

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: definitely be above the 180-day forward rate. be about the same as the 180-day forward rate. definitely be below the 180-day forward rate. none of the above; there is no relation between the futures and forward prices.

be about the same as the 180-day forward rate.

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. be hurt by; appreciated none of the above benefit from; depreciated be hurt by; depreciated

be hurt by; depreciated

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market. exceed; shortage be less than; surplus exceed; surplus be equal to; shortage be less than; shortage

be less than; surplus

Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. sell; buy buy; sell buy; buy sell; sell

buy; buy

When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency. buy; buy buy; buy sell; buy buy; sell

buy; sell

A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: selling a futures contract for a different amount of currency. buying an identical futures contract. buying a futures contract with a different settlement date. selling an identical futures contract. purchasing a put option contract in the same currency.

buying an identical futures contract.

If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. selling; buying; selling buying; selling; buying selling; buying; buying buying; buying; buying

buying; selling; buying

When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. call options; forward contracts forward contracts; futures contracts call options; put options futures contracts; call options

call options; forward contracts

Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge. cannot; can cannot; cannot can; can can; cannot

can; cannot

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar. cannot be determined from the information provided remain unchanged depreciate appreciate

cannot be determined from the information provided

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies triangular arbitrage covered interest arbitrage forward realignment arbitrage locational arbitrage

covered interest arbitrage

If interest rate parity exists, then ____ is not feasible. locational arbitrage triangular arbitrage forward realignment arbitrage covered interest arbitrage

covered interest arbitrage

Which of the following is not a form of exposure to exchange rate fluctuations? translation exposure economic exposure transaction exposure credit exposure

credit exposure

A ____ does not represent an obligation. currency swap currency option parallel loan long-term forward contract

currency option

Research has found that the options market is: none of the above efficient before controlling for transaction costs. highly inefficient. efficient after controlling for transaction costs.

efficient after controlling for transaction costs.

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____. decline; increase decline; decline increase; increase increase; decline

decline; decline

Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. increase; increase decline; decline decline; increase increase; decline

decline; decline

Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____. decline; decline increase; decline decline; increase increase; increase

decline; increase

If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value decrease; increase; upward decrease; decrease; upward increase; decrease; downward decrease; increase; downward increase; decrease; upward

decrease; increase; downward

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. decrease; the U.S. dollar increase; nondollar currencies decrease; nondollar currencies increase; the U.S. dollar

decrease; the U.S. dollar

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal. decrease; the U.S. dollar increase; the U.S. dollar increase; nondollar currencies decrease; nondollar currencies

decrease; the U.S. dollar

British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar. increase; downward decrease; upward decrease; downward increase; upward

decrease; upward

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis. premium; 11.11 percent discount; 11.11 percent discount; 10.81 percent premium; 10.81 percent

discount; 10.81 percent

Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____. premium; decrease discount; decrease discount; increase premium; increase

discount; increase

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____. yen; dollars dollars; yen yen; yen dollars; dollars

dollars; yen

Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately. downward cannot be determined no upward

downward

Assume that the United States experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.) downward upward and downward (offsetting) no upward

downward

Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country.. This will place ____ pressure on the value of the British pound. upward; downward upward; upward downward; upward downward; downward

downward; downward

Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect. upward; more downward; more downward; less upward; less

downward; more

Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound. upward; upward downward; downward downward; upward upward; downward

downward; upward

U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to: no exposure to exchange rate fluctuations. economic exposure. transaction exposure. translation exposure.

economic exposure.

Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to: transaction exposure. economic exposure. economic and transaction exposure. translation exposure.

economic exposure.

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market. exceed; surplus be less than; surplus be less than; shortage exceed; shortage

exceed; shortage

Investors from Germany, the United States, and the United Kingdom frequently invest in each other's currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar. more; depreciate fewer; depreciate fewer; appreciate more; appreciate

fewer; depreciate

An example of cross-hedging is: B and C use the forward market to sell forward whatever currencies you will receive. use the forward market to buy forward whatever currencies you will receive. find two currencies that are highly positively correlated; match the payables in one currency to the receivables in the other currency.

find two currencies that are highly positively correlated; match the payables in one currency to the receivables in the other currency.

If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge. put option none of the above call option forward

forward

If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries. spot; low forward; high spot; high forward; low

forward; high

A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions. forward; small futures; large forward; large none of the above

forward; large

Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting. technical none of the above fundamental market-based

fundamental

Which of the following forecasting techniques would be most likely to use relationships between economic factors and exchange rate movements to forecast the future exchange rate? technical forecasting market-based forecasting mixed forecasting fundamental forecasting

fundamental forecasting

Purchasing power parity is used in: market-based accounting. all of the above. fundamental forecasting. technical forecasting.

fundamental forecasting.

A ____ is not normally used for hedging long-term transaction exposure. currency swap long-term forward contact futures contract parallel loan

futures contract

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will ____. have the same result as a put option hedge on payables have the same result as a call option hedge on payables require more dollars than a money market hedge A and D have the same result as a money market hedge on payables

have the same result as a money market hedge on payables

If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate. lower; buy; upward higher; sell; upward higher; buy; upward higher; sell; downward

higher; buy; upward

The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be. higher; less lower; less lower; more higher; more

higher; more

According to the international Fisher effect, if Venezuela has a much higher nominal interest rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____. lower; weaken higher; weaken higher; strengthen lower; strengthen

higher; weaken

A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______. expected to depreciate; expected to appreciate highly negatively correlated; not highly correlated expected to appreciate; expected to depreciate highly positively correlated; not highly correlated

highly positively correlated; not highly correlated

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. illiquid; highly sensitive liquid; highly sensitive none of the above illiquid; insensitive

illiquid; highly sensitive

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: out of the money. at a discount in the money. at the money.

in the money.

When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____. in the money; out of the money out of the money; in the money out of the money; out of the money in the money; in the money

in the money; out of the money

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 and C are possible increase remain unchanged decrease

increase

If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period. stay the same increase slightly decrease substantially increase substantially

increase substantially

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. decrease; increase; downward decrease; increase; upward increase; decrease; downward increase; increase; upward increase; decrease; upward

increase; decrease; upward

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. increase; appreciate decrease; appreciate decrease; depreciate increase; depreciate

increase; depreciate

If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value. increase; downward decrease; upward decrease; downward increase; upward

increase; downward

Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal. decrease; nondollar currencies increase; the U.S. dollar decrease; the U.S. dollar increase; nondollar currencies

increase; the U.S. dollar

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal decrease; the U.S. dollar increase; the U.S. dollar increase; nondollar currencies decrease; nondollar currencies

increase; the U.S. dollar

If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value. decrease; upward decrease; downward increase; downward increase; upward

increase; upward

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; increases increases; decreases decreases; decreases decreases; increases

increases; decreases

The ____ hedge is not a technique to eliminate transaction exposure discussed in your text. futures forward currency option index money market

index

The real interest rate adjusts the nominal interest rate for: government controls. inflation. none of the above income growth. exchange rate movements.

inflation.

When the value of an influential factor from the prior period affects the forecast in the future period, this is an example of a(n): simultaneous input. B and C lagged input. instantaneous input.

lagged input.

Capital flows have become _______ over time; a significant portion of capital flows are due to _______ . remained about the same; large institutional investors larger; large institutional investors larger; international trade smaller; international trade

larger; large institutional investors

When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____. lagging leading all of the above currency diversification cross-hedging

leading

When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread. less; wider more; wider less; narrower more; narrower

less; wider

Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar. higher U.S. inflation; appreciate lower U.S. inflation; depreciate lower U.S. inflation; appreciate

lower U.S. inflation; depreciate

If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate. higher; sell; upward lower; sell; upward higher; sell; downward lower; sell; downward

lower; sell; downward

The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____. higher; stable none of the above lower; volatile lower; stable

lower; stable

The Basel III accord requires banks to: maintain higher levels of capital if they have riskier assets. increase lending to less developed countries. reduce their short-term loans. pay higher premiums for deposit insurance.

maintain higher levels of capital if they have riskier assets.

Which of the following forecasting techniques would be most likely to use today's forward exchange rate to forecast the future exchange rate? fundamental forecasting technical forecasting interval forecasting market-based forecasting

market-based forecasting

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions. more; even minor less; even minor more; only large none of the above less; only large

more; even minor

>From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is: positive and large. positive and small. negative. zero.

negative.

Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be: zero. negative. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. positive.

negative.

In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be: highly positive. zero. highly negative. none of the above

zero.

If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm's ____. negative; interest expenses positive; interest expenses negative; gross profit positive; gross profit

negative; gross profit

The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) $1.63; $1.63 $1.63; $1.60 none of the above $1.63; $1.57 $1.57; $1.63

none of the above

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

none of the above

Which of the following is true? The forward contracts offered by banks have maturities for only four possible dates in the future. none of the above A security deposit is not required for futures contracts. Most forward contracts between firms and banks are for speculative purposes.

none of the above

To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge. money market futures forward options

options

Conditional currency options are: options that allow the buyer to decide what currency the option will be settled in. options where the premiums are canceled if a trigger level is reached. none of the above options that do not require premiums.

options where the premiums are canceled if a trigger level is reached.

A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date. parallel loan currency option contract money market hedge long-term forward contract

parallel loan

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be: positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. negative. positive. zero.

positive.

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 ____. negative; interest expenses positive; gross profit negative; gross profit positive; interest expenses

positive; gross profit

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's ____. negative; interest expenses negative; gross profit positive; interest expenses positive; gross profit

positive; gross profit

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: purchase euro currency put options. purchase euros forward. purchase euro currency call options. sell euros forward remain unhedged.

purchase euros forward.

Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of: locational arbitrage. interest rate parity. purchasing power parity. the exchange rate mechanism.

purchasing power parity.

If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be: a forward sale of yen. purchasing yen put options. selling yen put options. a money market hedge.

purchasing yen put options.

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. purchasing; purchasing selling; purchasing selling; selling purchasing; selling

purchasing; selling

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price. put upward pressure on; put upward pressure on put downward pressure on; put upward pressure on put upward pressure on; put downward pressure on put downward pressure on; put downward pressure on

put upward pressure on; put downward pressure on

If you have an options position in which you might be obligated to buy euros, you are a: call writer. futures seller. put buyer. put writer.

put writer.

The Fisher effect is used to determine the: real spot rate. real forward rate. real inflation rate. real interest rate.

real interest rate.

Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will: receive $750,000 today. receive $480,000 in 90 days. pay $750,000 in 90 days. receive $750,000 in 90 days. receive $480,000 today.

receive $750,000 today.

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. reduce; reduce increase; reduce increase; increase reduce; increase

reduce; increase

Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows. reduction; increase reduction; reduction increase; increase increase; reduction

reduction; reduction

Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be: positive. negative. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. zero.

zero.

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____. decrease; increase; decrease remain unchanged; increase; increase increase; increase; increase remain unchanged; increase; decrease

remain unchanged; increase; decrease

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: purchase euro currency put options. remain unhedged. sell euros forward purchase euros forward. purchase euro currency call options.

sell euros forward

Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: purchase euros forward. purchase euro currency put options. purchase euro currency call options. remain unhedged. sell euros forward.

sell euros forward.

On January 1, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1, the Japanese firm informed Madison Co. that it wouldn't be able to fulfill the order. The Japanese yen spot rate on February 1 is $.0087, and the 2-month forward rate exhibits a 3 percent discount. To offset its existing contract, Madison Co. will negotiate a forward contract to ____ for the date of April 1, and the profit/loss generated from this transaction is a ____ U.S. dollars. to buy yen; loss of $30,000 sell yen; loss of $60,000 sell yen; gain of $60,000 buy yen; gain of $30,000

sell yen; loss of $60,000

A fundamental forecast that uses multiple values of the influential factors is an example of: factor analysis. technical analysis. sensitivity analysis. discriminant analysis.

sensitivity analysis.

A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. spot and exercise; spot spot and exercise; exercise exercise and spot; spot exercise and spot; exercise

spot and exercise; spot

Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, Jenco's imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____. decrease; increase increase; decrease increase; stay the same stay the same; stay the same

stay the same; stay the same

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. weak dollar; not weak dollar; favorably strong dollar; favorably strong dollar; not

strong dollar; favorably

Which of the following forecasting techniques would be most likely to use the historical exchange rate data for the euro to predict the euro's future exchange rate? market-based forecasting mixed forecasting fundamental forecasting technical forecasting

technical forecasting

The phrase "the dollar was mixed in trading" means that: the dollar was involved in some currency transactions, but not others. the dollar was strong in some periods and weak in other periods over the last month. the volume of trading was very high in some periods and low in other periods. the dollar strengthened against some currencies and weakened against others.

the dollar strengthened against some currencies and weakened against others.

A forward rate for a currency is said to exhibit a discount if: the forward rate is less than the expected future spot rate. the forward rate exceeds the existing spot rate. the forward rate exceeds the expected future spot rate. none of the above the forward rate is less than the existing spot rate.

the forward rate is less than the existing spot rate.

The premium of a currency put option should increase if: none of the above the spot rate increases. the volatility of the underlying asset increases. A and B.

the volatility of the underlying asset increases.

Gamma Corp. has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts are biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft - 1 + mt, where St is the spot rate of the pound in year t and Ft - 1 is the forward rate of the pound in year t - 1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate. overestimated none of the above correctly estimated underestimated

underestimated

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 ____. favorably; favorably affected but by a smaller degree favorably; unfavorably affected favorably; favorably affected by a higher degree unfavorably; favorably affected

unfavorably; favorably affected

Foreign exchange markets are generally found to be at least ____ efficient. semistrong-form strong form none of the above weak-form

weak-form

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____. weak; favorably affected none of the above weak; somewhat stable weak; adversely affected

weak; somewhat stable

If a foreign currency is expected to ____ substantially against the parent's currency, the parent may prefer to ____ the remittance of subsidiary earnings. appreciate; expedite weaken; expedite weaken; delay none of the above

weaken; expedite

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