Final 2

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

If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold

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

False

Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level.

less;higher

Assume the spot rate of the Swiss franc is $1.03 and the one-year forward rate is $1.08. The forward rate exhibits a ____ of ____.

premium; about 4.85%

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? a. 10 b. 13.28 c. 30.12 d. 39.84

a. 10 $20/$.664 = $30/3 = $10

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

a. 3 to 7

You have developed the following probability distribution: Probability 30% 40% 30% Possible Outcome ?2% ?3% ?4% MYRt = .005 + (.4)(.03) + (.7)(?.05) = ?1.80% The expected change in the Indian rupee in period t is: a. 3.40%. b. 0.40%. c. 3.10%. d. 1.70%. e. none of the above

a. 3.40%

which of the following would likely have the least direct influence on a country's current account?

a tax on income earned from foreign stocks

Which of the following would likely have the least direct influence on a country's current account?

a tax on income earned from foreign stocks.

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 ____%. a. 1.90 b. 2.00 c. 1.87 d. none of the above

a. 1.90

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. a. True b. False

b. False

27. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is ____ if the two currencies are ____ correlated.

high; negatively

35. 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

The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal.

greater; greater

If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____

have the same result as a money market hedge on payables

In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders. a. True b. False

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.

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.

The International Development Association was established to:

enhance economic development through low-interest rate loans (below-market rates).

The World Bank was established to:

enhance economic development through non-subsidized loans (at market interest rates).

an example of cross-hedging is:

find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.

Which one is not a factor that affect the spread?

forecasting rate

Which of the following is not a limitation of fundamental forecasting?

forecasts are 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

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.

If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge

forward

Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.

fundamental

Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?

fundamental forecasting.

84. 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.

False

85. Purely domestic firms are never affected by economic exposure.

False

87. Firms with more foreign costs than foreign revenues will generally be favorably affected by a stronger foreign currency.

False

88. Translation exposure affects an MNC's cash flows.

False

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

False

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 or False

False

covered interest arbitrage

If interest rate parity exists, then ____ is not feasible.

World Bank

International Bank for Reconstruction and Development (IBRD), was created in 1944. Major objective is to make loans to countries to enhance economic development

its technology; a specialized sales or service strategy

Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____.

Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization (WTO) d. International Development Association (IDA) e. Bank for International Settlements (BIS)

Foreign investors are especially attracted to the U.S. financial markets when the interest rate in their home country is substantially _____ (lower or higher) than that in the United States

Lower

Current Account: Factor Income Payments

Represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities)

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

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

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

T/F Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

T/F Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

T/F If a firm is hedging payables with futures contracts or forward contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.

T/F The strike price on a currency option is also known as an exercise price

Factors Affecting International Portfolio Investment

Tax Rates on Interest or Dividends: Investors normally prefer to invest in a country where taxes are relatively low Interest Rates: Money tends to flow to countries with high interest rates, as long as the local currencies are not expected to weaken Exchange Rates: Investors are attracted to a currency that is expected to strengthen

Credit Conditions

Tend to tighten when economic conditions weaken causing banks to be less willing to extend financing to MNCs

purchase Canadian supplies

Tennessee Co. conducts business in the US and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. the Canadian dollar is valued at about $.90. The net cash flows from US operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:

What does it mean if the US balance of trade is deficit?

That the value of merchandise and services exported by the US is less than the value of merchandise and services than its imports

Components of the Balance of Payments Statement

The Current, Credit and Financial Account

real interest rate

The Fisher effect is used to determine the:

The International Development Association was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

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

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound, Regression results indicate that a0 = 0 and a1 = 0.4. Therefore

Outsourcing

The process of subcontracting to a third party in another country to provide supplies or services that were previously produced internally

managed float system.

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a

82. 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

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

True

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

True

The North American Free Trade Agreement (NAFTA) increased restrictions on: A. trade between Canada and Mexico B. trade between Canada and the U.S. C. direct foreign investment in Mexico by U.S. firms

In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States. a. True b. False

The existence of imperfect markets has prevented the internationalization of financial markets. a. True b. False

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

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

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.

True

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

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

. 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 = .6 expected spot=.56 30 - day fwd = .62

(.61-.02) * 1000000

"Dumping" is used in the text to represent the: a. exporting of goods that do not meet quality standards. b. sales of junk bonds to foreign countries. c. removal of foreign subsidiaries by the host government. d. exporting of goods at prices below cost.

You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.94. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.98 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:

$.02

Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:

$0.021.

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

Brian Tull sold a put option on Canadian dollars for $.02 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.80. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian's net profit on the put option?

$3,500 = .02X50,000 + (.05x50,000)

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 $250,000 to conduct triangular arbitrage. What will be your profit from implementing this

$5,921

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 $1.18. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.14 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.14 in 90 days?

$782,110

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

$Purchase order / Peso bid quote $100,000 / $0.126 = 793,651

Value of New Zealand dollar Period Predicted Realized 1 $.52 $.50 2 .54 .60 3 .44 .40 4 .51 .50 Assume the following information: Given this information, the mean absolute forecast error as a percentage of the realized value is about:

($.52-$.5)/$.50=.04 ($.54-$60)/$.60=.10 ($.44-$.40)/$.40=.10 ($.51-$.50)/$.50=.02 /4 =.065 or 6.5%

FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable 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 payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?

(.71+.01)*200000=144000

Quasik Corporation 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 receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

(.73-.01)*300000=216000

Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% 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?

(1.05)^5/(1.08)^5-1=-13%; $.20(1+(-13%))=$.174.

A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.

(1.6-.02)*700000= 1106000

Assume that Smith Corporation 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.

(1.68+$.04)*200,000=$344,000.

(1.68+.04) * 200000 = 344000

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)?

(12.5 mil *. 55)- (12.5 mil *.03) 6500000

Lorre Company 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%+25%)=40%

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 on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.

(2%)*(-40%)=-8%, depreciate by .8%; tomorrow

Systematic risk is

*Market risk *the Non diversifiable risk that remains even after investors fully diversify their portfolio holdings

Exhibit 10-1 Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s). Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?

.5%- (1.65*1%)=-1.2%

Exhibit 10-1 Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s). Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01.

0.5%-(1.65*1%)=-1.2% 1.01*(-.012)*5,000,000=$-60,600.

What Financial Investments measure: 1) The net flow of funds due to financial asset transactions between individual or institutional investors 2) The expansion of firm's foreign operations

1) Portfolio and other capital investments 2) Direct Foreign Investments

Major Objectives of the IMF

1) Promote cooperation among countries on international monetary issues 2) Promote stability in exchange rates 3) Provide temporary funds to member countries attempting to correct imbalances of international payments 4) Promote free mobility of capital funds across countries 5) Promote free trade. It is clear from these objectives that the IMF's goals encourage increased internationalization of business

U.S. deposit rate for 1 year=11% U.S. borrowing rate for 1 yr=12% NewZeal dep. rate for 1yr=8% NewZeal bor. rate for 1 yr=10% NewZ $forw. rate for 1yr=$.40 NewZeal$ spot rate=$.39 Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm. 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 money market hedge?

1. Borrow NZ (600,000/1.1)=NZ545,455 2. Convert NZ (545,455*$39)=212,727 3. Invest (212,727*1.11)=$236,127.

Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.

1. Need to invest (200,000/1.05)=190,476 2. Need to exchange ( 190,476*2.02)=384,762 3.@ end of 180 days (384,762*1.04)=$400,152 none of the above

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 ____%.

1.07/1.05-1=1.90%

The value of the euro was $1.20 last week. During last week the euro depreciated by 3 percent. What is the value of the euro today?

1.164

The U.S. inflation rate is expected to be 3 percent over the next year, while the European inflation rate is expected to be 1.25 percent. The current spot rate of the euro is $1.19. Using purchasing power parity, the expected spot rate at the end of one year is $____.

1.21

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:

1.65-1.64-.03= -.02

Assume expected payables in 180 days. Spot = 0.50, 180 forward = 0.53, call option is strike at 0.52 with premium of 0.02. Possible spot rates: 0.48 - 10% 0.53 - 60% 0.55 - 30% What is the probability that the forward will result in a higher payment than the options hedge?

10%

Assume expected receivable in 90 days. spot rate = 0.62, 90-day forward = 0.635. Possible spot rates: 0.61 - 10% 0.63 - 20% 0.64 - 40% 0.65 - 30% What is the probability that the forward hedge will result in more dollars received than not hedging?

10% + 20% = 30%

Assume you have future receivables of Australian dollars 180 days from now. Put options available at strike of 0.50 and premium of 0.02. Possible spot rates: 0.46 - 20% 0.48 - 30% 0.52 - 50% What is the probability that the put option will be exercised, assuming he purchased it?

20% + 30% = 50%

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.

220000

A fully diversified U.S. portfolio is about

27 percent as risky as a typical individual stock.

The bid/ask spread for small retail transactions is commonly in the range of ____ percent.

3 to 7

. You are the treasurer of Montana Corporation 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%

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?

47500

Intracompany trade makes up approximately ____ percent of all international trade.

Assume the following information: Predicted Value of Realized Value of Period New Zealand Dollar New Zealand Dollar 1 $.52 $.50 2 .54 .60 3 .44 .40 4 .51 .50 Given this information, the mean absolute forecast error as a percentage of the realized value is about:

6.5%.

Assume NZ dollars expected receivables in 180 days. Spot = 0.50, 180 forward = 0.51, put option is strike at 0.51 with premium of 0.02. Possible spot rates: 0.48 - 10% 0.49 - 60% 0.55 - 30% What is the probability that the forward hedge will result in more US dollars received than the options hedge?

70%

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?

70000*.5 = 35000 70000*.02 = 1400 35000+1400= 36400

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

84000

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

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

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

Eurobonds: a. are usually issued in bearer form. b. typically carry several protective covenants. c. cannot contain call provisions. d. A and B

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

If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian dollars. b. obtain a 90-day forward sale contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate.

International money market transactions normally represent: a. the equivalent of $1 million or more. b. the equivalent of $1,000 to $10,000. c. the equivalent of between $10,000 and $100,000. d. the equivalent of between $100,000 and $200,000.

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

The Basel II accord is focused on eliminating inconsistencies in ____ across countries. a. capital requirements b. deposit rates c. deposit insurance d. bank failure policies

The International Financial Corporation was established to: A. enhance economic development of the private sector through investment in stock of corporations. B. enhance economic development through low-interest rate loans (below-market rates). C. enhance economic development through non-subsidized loans (at market interest rates). D. enhance development solely in Asia through grants.

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

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

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

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

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

____ represent aid, grants, and gifts from one country to another. A. Transfer payments B. The balance of payments C. Factor income D. The balance of trade

weak; somewhat stable

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 ____.

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

decrease; decrease

Structural Adjustment Loans (SALs)

A key aspect of the World Bank's mission. They are intended to enhance a country's long-term economic growth

[4,000,000-3,500,000]*1.14^3 =$740,772

A project in Malaysia costs $4,000,000. Over the next three years, the project will generate total operating cash flows of $3,500,000, measured in today's dollars using a required rate of return of 14 percent. What is the break-even salvage value of this project?

Current Account

A summary of flow of funds due to purchases of goods or services or the provision of income on financial assets.

low unemployment and high inflation in the U.S.

A weak dollar is normally expected to cause

upward; upward

A weak dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates.

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

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

A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

The U.S. dollar is not ever used as a medium of exchange in: a. industrialized countries outside the U.S. b. in any Latin American countries. c. in Eastern European countries where foreign exchange restrictions exist. d. none of the above

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

A) They have a visible trading floor.

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 $____. a. 48.90 b. 146.70 c. 55.21 d. none of the above

B 3 x 30 x $1.63 = $146.70

Eurobonds: A) are usually issued in bearer form. B) typically carry several protective covenants. C) cannot contain call provisions. D) Both A and B

A) are usually issued in bearer form.

According to the text, the forward rate is commonly used for: A) hedging B) immediate transactions. C) previous transactions. D) bond transactions.

A) hedging

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?

A1,000,000-A1,500,000=-A500,000*55%=-275,000 $275,000 outflow.

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.

AS HE IS A PURCHASER OF POUNDS, HE HAS TO TAKE CALL OPTION TO SAFEGUARD FROM HIGHER PAYMENT DUE TO PRICE RISE CALL PREMIUM TO BE PAID = 200000 POUND X $0.04 = 8000 AMOUNT PAYABLE IN DOLLARS FOR 200000 POUND = 200000 X $1.68 = $336000 SO WHATEVER HAPPENS TO THE MARKET, MAXIMUM AMOUNT OF DOLLARS PAYABLE = $336000 + $8000 = $344000 ANSWER : a : $344000

Trade volume between the United States and Other Countries:

About 20 percent of all U.S. exports are to Canada, while 13 percent are to Mexico. (Exhibits 2.3 and 2.4) Canada, China, Mexico, and Japan are the key exporters to the United States. Together, they are responsible for more than half of the value of all U.S. imports.

the international Fisher effect (IFE)

According to ___________, a country with a higher interest rate will have higher expected inflation.

would compete with local firms of the host country

According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:

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

According to interest rate parity (IRP)

decrease; increase

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.

the British pound will appreciate against the dollar

According to the IFE, if British interest rates are lower than U.S. interest rates

True

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.

higher; weaken

According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.

is due to their inflation differentials.

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:

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

All of the above

Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because

Exchange Rates and International Friction

All governments cannot weaken their home currencies simultaneously. Actions by one government to weaken its currency causes another country's currency to strengthen. Government attempts to influence exchange rates can lead to international disputes.

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

B Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%

Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization d. International Development Association (IDA) e. Bank for International Settlements (BIS)

Bank for International Settlements (BIS)

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

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

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

Among the reasons that purchasing power parity (PPP) does not consistently occur are:

exchange rates are affected by interest rate differentials, exchange rates are affected by national income differentials and government controls, supply and demand may not adjust if no substitutable goods are available.

Among the reasons that purchasing power parity (PPP) does not consistently occur are:

Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)?

An appreciation of the country's currency

find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.

An example of cross-hedging is:

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

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

Factor income received by US investors reflects...

An inflow of funds into the US

Factor income paid by US reflects...

An outflow of funds from the US

Increase; U.S. dollar

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; increase

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency appreciates against B, then A's exports to C should ____, and A's imports from C should ____.

depreciates; decreases

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.

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

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?

the parent finances the entire investment.

Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

2 percentage points above; depreciate by about 2 percent

Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____.

Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65%

Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is:

downward pressure on the yen's spot rate

Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity?

discount; the size of the discount increased

Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month.

discount; depreciate

Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a _______, and the spot rate of the Canadian dollar will _____________ over the next year.

outward shift; downward

Assume that the Fed intervenes by exchanging euros for dollars in the foreign exchange market. This will cause an ____ in the supply of euros in the foreign exchange market, and will place _______ pressure on the value of the euro.

Swiss investors who attempt covered interest arbitrage earn a higher return than American investors who attempt covered interest arbitrage.

Assume that the Swiss interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

lower U.S. inflation; depreciate

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.

4 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?

*Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: a. about .3621 Canadian dollars. b. about .3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars.

B $.35/$.88 = .3977

4% (1 + .05)/(1 + .07) x $0.689 = $0.676. ($100,000/A$0.689)x (1 + .06) = A$153,846 x $0.676 = $104,000. ($104,000 - $100,000)/$100,000 = 4%

Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. 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?

appreciate; 4.85

Assume that the inflation rate in Singapore is 3 percent, while the inflation rate in the United States is 8 percent. According to PPP, the Singapore dollar should ____ by ____percent.

Solution: (1.08/1.03) =appreciate; 4.85

Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.

should exhibit a premium.

Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X

3.43% (1 + .05) x (1 + .015) - 1 = 3.43%

Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.

Solution: (1+.07)/(1+.05)-1 =appreciate; 1.9%

Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound's spot exchange rate should ____ by about ____ over the year.

appreciate; 1.9%

appreciate; appreciate

Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

Assume a Japanese firm invoices exports to the U.S. 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. a. depreciate; buying b. depreciate; selling c. appreciate; selling d. appreciate; buying

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

Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: a. about .3621 Canadian dollars. b. about .3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars.

Certificates representing bundles of stock of non-U.S. firms are called: a. Eurobonds b. ADRs c. FRNs d. Eurobor

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

Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC's needs. a. more standardized; standardized b. more standardized; custom-tailored c. more custom-tailored; standardized d. more custom-tailored; custom-tailored e. less standardized; custom-tailored

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

If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds. a. derivative b. long-term credit c. money d. foreign exchange

The World Bank was established to: A. enhance economic development of the private sector through investment in stock of corporations. B. enhance economic development through non-subsidized loans (at market interest rates). C. enhance economic development through low-interest rate loans (below-market rates). D. enhance development solely in Asia through grants.

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

The international credit market primarily concentrates on: a. short-term lending (less than one year). b. medium-term lending. c. long-term lending. d. providing an exchange of foreign currencies for firms who need them. e. placing newly issued stock in foreign markets.

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

Which of the following is not true about syndicated loans? a. A borrower that receives a syndicated loan incurs various fees besides the interest rate. b. The loans are only denominated in U.S. dollars. c. The loans are provided by a group of banks to a borrower. d. The loans are usually formed in 6 weeks or less.

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

Which of the following is not true about syndicated loans? A) A borrower that receives a syndicated loan incurs various fees besides the interest rate. B) The loans are only denominated in U.S. dollars. C) The loans are provided by a group of banks to a borrower. D) The loans are usually formed in 6 weeks or less.

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

When obtaining a loan, the risk premium paid above LIBOR depends on the: A) risk-free interest rate of the borrower. B) credit risk of the borrower. C) borrower's stock price. D) lender's stock price.

B) credit risk of the borrower.

Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.

Buy yen put options

Bank for International Settlements (BIS)

reduce the probability that PPP shall hold.

Because there are a variety of factors in addition to inflation that affect exchange rates, this will:

What is the annual international trade volume of the United States

Between 10 and 20 percent of its annual GDP

A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:

Buying franc call options

A forward contract can be used to lock in the ____ of a specified currency for a future point in time. a. purchase price b. sale price c. A or B d. none of the above

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 ____. a. $13.64 b. $15.00 c. $16.50 d. 16.50 euros e. none of the above

A. economic growth in foreign countries decreases. B. U.S. inflation rises. C. the currencies of foreign countries strengthen against the dollar

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

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

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

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

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

Futures contracts are typically ____; forward contracts are typically ____. a. sold on an exchange; sold on an exchange b. offered by commercial banks; sold on an exchange c. sold on an exchange; offered by commercial banks d. offered by commercial banks; offered by commercial banks

The demand for U.S. exports tends to increase when: A. economic growth in foreign countries decreases. B. U.S. inflation rises. C. the currencies of foreign countries strengthen against the dollar

The forward market: a. for euros is very illiquid. b. for Eastern European countries is very liquid. c. does not exist for some currencies. d. none of the above

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

The largest global exchange is: a. NASDAQ b. Tokyo Stock Exchange c. NYSE Euronext d. London Stock Exchange

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

When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the: a. closing prices in the U.S. during the previous day. b. closing prices in Canada during the previous day. c. prevailing prices in locations where the foreign exchange markets have been open. d. officially set by central banks before the U.S. market opens.

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

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

Which of the following factors probably does not directly affect a country's capital account and its components? A. Interest rates B. Withholding taxes on foreign income C. Inflation D. Exchange rate movements

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

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

Which of the following is true? a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. b. U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries. d. A and B

C 15 x $1.10 = $16.50

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

C Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65%

Which of the following is not a method that can be used to invest internationally? a. Investment in MNC stocks b. American depository receipts (ADRs) c. World Equity benchmark Shares (WEBS) d. International mutual funds e. All of the above are methods that can be used to invest internationally.

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

Factors Affecting Direct Foreign Investment

Changes in Restrictions: New opportunities have arisen from the removal of government barriers. Privatization: DFI is stimulated by new business opportunities associated with privatization. Managers of privately owned businesses are motivated to ensure profitability, further stimulating DFI. Potential Economic Growth: Countries with greater potential for economic growth are more likely to attract DFI. Tax Rates: Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI. Exchange Rates:Firms typically prefer to pursue DFI in countries where the local currency is expected to strengthen against their own.

Because the World Bank provides only a small portion of the financing needed by developing countries, it attempts to spread funds by entering into..

Cofinancing Agreements

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

purchases more U.S. exports than the other countries listed here.

Canada

Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is (CD/PS):

Canadian Dollar = $0.88 per CAD Peruvian Sol = $0.35 per Sol Now Canadian Dollar per Sol = ($0.35/Sol)/($0.88/CAD) Now Canadian Dollar per Sol = 0.3977, So B is the answer

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

Exchange Rate:Limitations of a Weak Home Currency Solution

Competition: foreign companies may lower their prices to remain competitive. Impact of other currencies: a country that has balance of trade deficit with many countries is not likely to solve all deficits simultaneously. Prearranged international trade transactions: international transactions cannot be adjusted immediately. The lag is estimated to be 18 months or longer, leading to a J-curve effect. (Exhibit 2.6) Intracompany trade: Many firms purchase products that are produced by their subsidiaries. These transactions are not necessarily affected by currency fluctuations.

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

Corporations who expect to collect a foreign account receivable in one month

Factors affecting International Trade Flows

Cost of labor, inflation, national income, credit conditions and government policies

91. Which of the following is not a form of exposure to exchange rate fluctuations?

Credit exposure

Exchange Rates

Current account decreases if currency appreciates relative to other currencies

Inflation

Current account decreases if inflation increases relative to trade partners

National Income

Current account decreases if national income increases relative to other countries.

9. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm? a. purchase a currency put option in British pounds. b. sell pounds forward. c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. d. A and B

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)? a. 73.75. b. 125. c. 1.69. d. 0.014. e. none of the above

A syndicated loan: a. represents a loan by a single bank to a syndicate of corporations. b. represents a loan by a single bank to a syndicate of country governments. c. represents a direct loan by a syndicate of oil-producing exporters to a less developed country. d. represents a loan by a group of banks to a borrower. e. A and B

According to the text, the average foreign exchange trading around the world ____ per day. a. equals about $200 billion b. equals about $400 billion c. equals about $700 billion d. exceeds $1 trillion

An obligation to purchase a specific amount of currency at a future point in time is called a: a. call option b. spot contract c. put option d. forward contract e. both B and D

Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is a. .01 b. 118 c. 1.18 d. .0087

Eurobonds: a. can be issued only by European firms. b. can be sold only to European investors. c. A and B d. none of the above

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

____ is not a factor that affects the bid/ask spread. a. Order costs b. Inventory costs c. Volume d. All of the above factors affect the bid/ask spread

*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)? a. 73.75. b. 125. c. 1.69. d. 0.014. e. none of the above

D ($.008/$.59) = F$.014/¥

Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is a. .01 b. 118 c. 1.18 d. .0087

D .85/98 = .0087

The Oriental Mercantile Bank, headquartered in Singapore, services many U.S.-based MNC clients. Assume that it quotes USD per SGD at 0.7352-0.7358 (SGD refers to Singapore dollars). Assume that a U.S. customer is receiving SGD 40,000 from a customer in Singapore and wishes to convert this amount into USD. What is the amount received in USD? A) $29,927 B) $29,834 C) $29,600 D) $29,408

D) $29,408 the firm receives SGD 40,000 from a customer. So, the converted value in USD = SGD 40,000 * $0.7352/SGD = $29,408

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

D) forward contract

A syndicated loan: A) represents a loan by a single bank to a syndicate of corporations. B) represents a loan by a single bank to a syndicate of country governments. C) represents a direct loan by a syndicate of oil-producing exporters to a less developed country. D) represents a loan by a group of banks to a borrower. E) A and B

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

Assume the following information: Predicted Value of New Zealand Dollar $.52 .54 .44 .51 Realized Value of New Zealand Dollar $.50 .60 .40 .50 Period 1 2 3 4 Given this information, the mean absolute forecast error as a percentage of the realized value is about: a. 1.5%. b. 26%. c. 6%. d. 6.5%. e. none of the above

D. 6.50% SOLUTION: [|$.52 ? $.50|/$.50 + |$.54 ? $.60|/$.60 + |$.44 ? $.40|/$.40 + |$.51 ? $.50|/$.50)]/4 = [.04 + .10 + .10 + .02]/4 = .065 = 6.50%

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

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

If a US firm purchases all of Heineken's stock in an acquisition, this transfer would result in a transfer of control... Would this be classified as a Direct Foreign Investment or a Portfolio Investment

Direct Foreign Investment

Direct foreign investment into the U.S. represents a ____. a. capital inflow b. trade inflow c. capital outflow d. trade outflow

all of the Above

Direct foreign investment is commonly considered by MNCs because it allows the MNC to:

the products to be produced are going to be exported.

Direct foreign investment would typically be welcomed if:

4. 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?

Diz Co.

A U.S. investor bought a one-year French security for €10,000 and received €10,550 at the end of the year. The exchange rate on the date the investment was made was $0.87265/€ and the rate on the date it matured was $1.27244/€. The dollar-equivalent rate of return was

Dollars invested = €10,000 ×$0.87265/€ = $8,726.50. Dollars received = €10,550 ×$1.27244/€ = $13,424.24. Dollar rate of return = ($13,424.24 - $8,726.50)/$8,726.50 = 53.83%.

An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.

Downward

covered interest arbitrage

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.

locational arbitrage

Due to ____, market forces should realign the spot rate of a currency among banks.

The interest rate on the syndicated loan depends on the: a. currency denominating the loan. b. maturity of the loan. c. creditworthiness of the borrower. d. interbank lending rate. e. all of the above.

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. a. True b. False

the exposure of a firm's cash flows to exchange rate fluctuations.

Economic exposure refers to:

Summary of Government Policies:

Every government implements some policies No formula ensure a completely fair contest for market share

Why exchange rates may not correct a balance of trade deficit:

Exchange rates will not automatically correct any international trade balances when other forces are at work

Which of the following statements is not true?

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

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

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

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

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

Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies. a. True b. False

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

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

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

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

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

T/F 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

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

T/F 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

T/F When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.

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

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

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

The degree of financial information that must be provided by public companies is the same among countries. a. True b. False

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

is (are) income received by investors on foreign investments in financial assets (securities).

Factor Income

Policies to Punish Country Governments: Many expect countries to restrict imports from countries that ...

Fail to enforce environmental laws and child labor laws Initiate war against another country Unwilling to participate in a war

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

False

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

False

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

False

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

False

51. An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.

False

52. Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is 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

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

False

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

False

59. A reduction in hedging will probably reduce transaction exposure.

False

61. The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

False

78. 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

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

False

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

False

81. Currency correlations are generally negative.

False

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

False

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

False; because the lower the spread, the more liquid the currency is.

Cost of Labor

Firms in countries where labor costs are low commonly have an advantage when competing globally, especially in labor intensive industries

sold on an exchange; offered by commercial banks

Futures contracts are typically ____; forward contracts are typically ____.

The ____, an accord among 117 nations, called for lower tariffs around the world

General Agreement on Tariffs and Trade (GATT)

Assume that 1 US dollar is equal to 1.25 Australian Dollar and 3.12 Brazilian Real. What is the Brazilian Real per Australian dollar exchange rate?

Given 1 US dollar = 1.25 Australian dollar ------------- 11 US dollar = 3.12 Brazilian Real -------------------- 2dividing 2 by 1 we get Brazilian real / Australian dollar = 3.12 / 1.25 = 2.50 Therefore the second option about 2.50 Brazilian real per Australian Dollars is the correct choice

a. the nominal interest rates of both countries are the same. b. the inflation rates of both countries are the same. c. the exchange rates of both countries will move in a similar direction against other currencies. d. none of the above ANSWER D

Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:

Retail bid-ask spreads are ________, and so ______ profitable than wholesale spreads, because market maker must cover the fixed cost of a transaction that applies to even small currency trades.

Higher, More

Direct Intervention

How does the government intervention establish implicit exchange rate boundaries?

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.

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

If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur?

benefit; strengthens

If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.

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 ____.

increase; decrease; upward

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.

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). a. decrease b. increase c. remain unaffected d. either A or C are possible

high and positive; less

If countries are highly influential upon each other, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.

2.9% (1.06/1.03)-1

If nominal British Interest rates are 3% an nominal U.S. interest rates are 6%, then the British Pound is expected to_____ by about____ percent, according to the international fisher effect (IFE).

False

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

weaken

If the Fed uses a stimulative monetary policy, it may be very concerned about causing inflation if the dollar's value is expected to

Interest rate differentials; inflation and income differentials.

If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

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

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

If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:

high; parent's

If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view

92. Which of the following is not true regarding currency correlations?

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

purchasing; selling

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

U.S. reliance on foreign funds:

In general, access to international funding has allowed more growth in the U.S. economy over time but has also made the U.S. more reliant on foreign investors.

94. Which of the following is not true regarding economic exposure?

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

In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China. a. small; surplus b. large; surplus c. small; deficit d. large; deficit

Impact of Outsourcing

Increased international trade activity because MNCs now purchase products or services from another country Lower cost of operations and job creation in countries with low wages

Which of the following factors probably does not directly affect a country's capital account and its components?

Inflation

Regional Development Agencies

Inter-American Development Bank: focusing on the needs of Latin America Asian Development Bank: established to enhance social and economic development in Asia African Development Bank: focusing on development in African countries European Bank for Reconstruction and Development: created in 1990 to help the Eastern European countries adjust from communism to capitalism

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? a. purchasing power parity (PPP). b. triangular arbitrage. c. international Fisher effect (IFE). d. interest rate parity (IRP).

Interest rate parity (IRP)

International Financial Corporation (IFC)

Financial Account: Direct Foreign Investment

Investments in fixed assets in foreign countries Example: A firm's acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion of an existing plant in a foreign country

U.S.-based mutual funds known as country funds.

Invests exclusively in stocks of a single country.

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

The following is not a limitation of technical forecasting:

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

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).

It could attempt to strengthen its local currency value.

Weaken the dollar

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

5. 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?

Kriner Co.

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?

Kriner Co.

purchasing power parity.

Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:

all OF THE above.

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 Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

9. Economic exposure can affect:

MNCs only. purely domestic firms only. A and B

Organization for Economic Cooperation and Development (OECD)

Major objective is to facilitate governance in governments and corporations of countries with market economics It has 30 member countries and has relationships with numerous countries Promotes international country relationships that lead to globalization

International Financial Corporation (IFC)

Major objective is to promote private enterprise within countries Provides loans to corporations and purchases stock It traditionally has obtained financing from the World Bank but can borrow in the international financial markets

World Trade Organization (WTO)

Major objective is to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord Member countries are given voting rights that are used to make judgments about trade disputes and other issues

International Development Association (IDA)

Major objectives is to extend loans at low interest rates to poor nations that cannot qualify for loans from the World Bank

Bank for International Settlements (BIS)

Major objectives is to facilitate cooperation among countries with regard to international transactions Provides assistance to countries experiencing a financial crisis Sometimes referred to as the "central banks' central bank" or the "lender of last resort"

Managerial Decisions about Outsourcing

Managers of a U.S.-based MNC may argue that they create jobs for U.S. workers. Shareholders may suggest that the managers are not maximizing the MNC's value as a result of their commitment to creating U.S. jobs. Managers should consider the potential savings that could occur as a result of outsourcing. Managers must also consider the possible bad publicity or bad morale that could occur among the U.S. workers.

more difficult than

Managing economic exposure is generally perceived to be ____ managing transaction exposure.

Current Account: Payments for Merchandise and Services

Merchandise exports and imports represent tangible products that are transported between countries. Service exports and imports represent tourism and other services. The difference between total exports and imports is referred to as the balance of trade

SOLUTION: $10,000/$1.62 = £6,172.84 x 2.95 = NZ$18,209.88 x $.55 = $10,015.43. Thus, the profit is $15.43.

National Bank quotes the following for the British pound and the New Zealand dollar. Value of a British pound (£) in $ is $1.61 (quoted bid price) while value of a British pound (£) in $ is $1.62 (quoted ask price). Value of a New Zealand dollar (NZ$) in $ is $0.55 (quoted bid price) while value of a New Zealand dollar (NZ$) in $ is $0.56 (quoted ask price). The bank also quotes that value of British pound in New Zealand dollar is NZ$2.95 (quoted bid price) while value of British pound in New Zealand dollar is NZ$2.96 (quoted ask price). Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

The North American Free Trade Agreement (NAFTA) increased restrictions on:

None of the Above

The U.S. typically has a balance-of-trade surplus in its trade with

None of the Above

Cofinancing is preformed in which ways:

Official Aid Agencies-Low income countries Export Credit Agencies-export credit agencies Commercial Banks-private sector development

Compensatory Financing Facility (CFF)

One of the key duties of the IMF. Attempts to reduce the impact of export instability on countries. It is used mainly by developing countries experiencing financial problems resulting in reduced export earnings must demonstrate that the reduction is temporary and beyond its control

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.

Options

depreciate; low

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

appreciate; low

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

Criticism of outsourcing

Outsourcing may reduce jobs in the United States

Main Components of the Current Account

Payments for merchandise and services, factor income, and transfers

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

Points below the IRP line represents situations where:

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?

Purchase MYR from Bank A @ Ask rate: = 500,000 / 0.305 = 1,639,344.26 Sell These MYR in Bank @ Bid Rate: = 1,639,344.26 * 0.306 = $ 501,639.34 Arbitrage = Risk less Profit i.e 1639.34 [ 501,639.34 - 500,000 ] that is gained using market inequalities

If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:

Purchasing euro call options

False

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

Crown Co. is expecting to receive 525,500 Brazilian Real. Crown decided to purchase put option on Brazilian Real for a premium $.03 per unit. The exercise price was $.38 and the spot rate at the time the real option was exercised was $.31. What is the total amount that Crown Co. received?

Put option is the right to sell a specified asset at a specified price on a future date The option is exercised when the strike price is higher than the market price Since the strike price is higher, the option will be exercised Amount received = (Strike price - market price - premium)*Number of units = (0.38-0.31 - 0.03)*525,500 = $21,020 Hence, the answer is $21,020

(0.73-0.01)*300,000 = $216,000

Quasik Corporation 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 receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

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 480000 in 90 days

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

Reduce

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; increase

Financial Account

Refers to special types of investment, including DFI and portfolio investment

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

Remain unhedged

Growth in International Trade: Events That Increased Trade Volume

Removal of the Berlin Wall: Led to reductions in trade barriers in Eastern Europe. Single European Act of 1987: Improved access to supplies from firms in other European countries. North American Free Trade Agreement (NAFTA): Allowed U.S. firms to penetrate product and labor markets that previously had not been accessible. General Agreement on Tariffs and Trade (GATT): Called for the reduction or elimination of trade restrictions on specified imported goods over a 10-year period across 117 countries. Inception of the Euro: Reduced costs and risks associated with converting one currency to another. Expansion of the European Union: reduced restrictions on trade with Western Europe. Other Trade Agreements: The United States has established trade agreements with many other countries.

Current Account: Transfer Payments

Represent aid, grants, and gifts from one country to another

Current Account: Transfers

Represent aid, grants, and gifts from one country to another

True

Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.

Impact of Government Policies

Restrictions on Imports Subsidies for Exporters Restrictions on Piracy Environmental Restrictions Labor Laws Business Laws Tax Breaks Country Trade Requirements Government Ownership or Subsides Country Security Laws

Government Policies

Restrictions on imports Subsidies for exporters Restrictions on piracy Environmental restrictions Labor laws Tax breaks Country security laws Government ownership or subsidies Country security laws Policies to punish country governments

U.S. deposit rate for 1 year=11% U.S. borrow rate for 1 year=12% Swiss deposit rate for 1 year=8% Swiss borrow rate for 1 yr=10% Swiss forward rate for 1 yr=$.40 Swiss franc spot rate=$.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?

SF600,000*$.40=$240,000.

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:

Sell euros forward

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 at that time, 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% premium. Assume there are no transaction costs. What are the two best possible hedging strategies and how many U.S. dollars will Crown Co. receive under each strategy, assuming its one-year spot rate expectation is true?

Selling pounds forward or buying a put option Selling forward 1.51*(1.0265)=1.55*100000= 155000 Buy put option 1.54-.03=1.51*100000= 151000

Assume the parker company will receive SF200,000 in 360 days. Assume the following interest rates: 360-day borrowing rate U.S= 7%,, Switzerland =5% 360-day deposit rate U.S=6%,,Switzerland =4% Assume the forward rate of the Swiss franc is $0.50 and the spot rate of the Swiss franc is $0.48. If Parker company uses a money market hedge, how much it will receive in 360 days? Please show steps

Solution 1. Borrow SF190,476 (SF200,000/1.05) = SF190,476. 2. Convert SF190,476 to $91,428 (SF190,476 × $.48) = $91,428. 3. Invest $91,428 at 6% to accumulate $96,914 ($91,428 × 1.06) = $96,914. it will receive in 360 days=$96914

The financing by the IMF is measured in what?

Special Drawing Rights (SDRs)

A U.S. bank is quoting 1.22 and 1.24 for USD per EUR. What is the spread in percentage terms?

Spread = 1.24 - 1.22 = 0.02 Spread % = 0.02 / 1.24 = 1.61%

Capital Account

Summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time Originally included the financial account Includes the value of financial assets transferred across country borders by people who move to a different country Includes patents and trademarks Relatively minor(in terms of dollar amounts) to financial account

Balance of Payments

Summary of transactions between domestic and foreign residents for a specific country over a specified period of time

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

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

In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy. a. True b. 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. a. True b. False

Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies. a. True b. False

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

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

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

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

Purchasing power parity is used in: a. technical forecasting. b. fundamental forecasting. c. market-based accounting. d. all of the above.

b. fundamental forecasting

The International Financial Corporation was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

The value of MNC depends on all of the above factors

The MNC's value depends on all of the following, except:

The North American Free Trade Agreement (NAFTA) increased restrictions on: a. trade between Canada and Mexico. b. trade between Canada and the U.S. c. direct foreign investment in Mexico by U.S. firms. d. none of the above.

Trend in U.S. Balance of Trade

The U.S. balance of trade deficit increased substantially from 1997 until 2008. In the 2008-2009 period, U.S. economic conditions weakened and the U.S. demand for foreign products and services decreased. In recent years, the U.S. annual balance of trade deficit with China has exceeded $200 billion. Any country's balance of trade can change substantially over time.

The U.S. typically has a balance of trade surplus in its trade with ____. a. China b. Japan c. A and B d. none of the above

The World Bank was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

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

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

Which of the following would increase the current account of Country X? Country Y is Country X's sole trading partner.

The central banks of Country X and Country Y reduce the money supply to increase interest rates.

appreciated

The currency of Country X is pegged to the currency of Country Y and will remain pegged. Assume that Country Y's currency appreciated against the dollar during the last week. In this case, the currency of Country X _______ against the dollar during the last week.

the currencies of foreign countries strengthen against the dollar.

The demand for U.S. exports tends to increase when:

The demand for U.S. exports tends to increase when: a. economic growth in foreign countries decreases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above.

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

90. 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.

True

Sf = 200,000/1.04 = 192,308 = 192,308*0.48 = 92,308 =92,308*1.07=98,770

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

Which of the following is not a "subtle" trade restriction Country X may use against Country Y?

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

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:

The inflation differential

$0.0070. (1.03/1.10) x $.0075 = $.0070

The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

$1.47. (1.05/1.07) x (1.50) = $1.47.

The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:

$1.47.

The interest rate in the United Kingdom is 7 percent, while the interest rate in the United States is 5 percent. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of

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

short-term lending (one year or less).

The international money market primarily concentrates on:

International Trade.

The least risky method by which firms conduct international business is:

39. ____ is (are) not a determinant of translation exposure.

The local (domestic) earnings of the MNC

(F/S) − 1 = ($1.60/$1.63) − 1 = discount; 1.8

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

ALL of the above

The premium of a currency put option will increase if:

balance of trade.

The primary component of the current account is the:

The primary component of the current account is the: a. balance of trade. b. balance of money market flows. c. balance of capital market flows. d. unilateral transfers.

Which of the following is not a goal of the International Monetary Fund (IMF)?

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

payable; purchase

To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.

options

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.

sell the currency forward

To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.

How to calculate Current Account Balance

Total US Exports and Income Receipts - Total US Imports and Income Ptms - Net Transfers by the US

25. ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Transaction

____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Transaction

the exposure of a firm's international contractual transactions to exchange rate fluctuations.+

Transaction exposure reflects:

Financial Account: Portfolio Investment

Transactions involving long term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control Example: A purchase of Heineken stock by a US investor is classified as this because it represents a purchase of foreign financial assets without changing he control of the company

Financial Account: Other Capital Investments

Transactions involving short-term financial assets (such as money market securities) between countries

____ represent aid, grants, and gifts from one country to another

Transfer payments

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

True

43. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.

True

44. Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.

True

48. The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.

True

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

True

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

True

53. 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.

True

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

True

55. 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.

True

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

True

60. The VAR method presumes that the distribution of exchange rate movements is normal.

True

62. If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.

True

63. Some MNCs are subject to economic exposure without being subject to transaction exposure.

True

64. 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

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. True or 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 or False

True

The VAR method presumes that the distribution of exchange rate movements is normal.

True

To hedge a receivable position with a currency option hedge, an MNC would buy a put option

True

Which of the following is the biggest target of direct foreign investment by U.S. firms?

U.K

Impact of International Capital Flows: The United States relies heavily on foreign investment in

U.S. manufacturing plants, offices, and other buildings Debt securities issued by U.S. firms U.S. Treasury debt securities

37. If the U.S. dollar appreciates, an MNC's:

U.S. sales will probably decrease.

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?

How to calculate Total US Exports and Income Receipts

US Exports of Merchandise + US Exports of Services + US Income Receipts

How to calculate Total US Imports and Income Payments

US Imports of Merchandise + US Imports of Services + US Income Payments

central bank intervention in the foreign exchange market is not necessary.

Under a freely floating exchange rate system

the inflation differential

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and

International Monetary Fund (IMF)

Was formed in July 1944 Is to encourage the increased internationalization of business

How exchange rates may correct a balance of trade deficit:

When a home currency is exchanged for a foreign currency to buy foreign goods, then the home currency faces downward pressure, leading to increased foreign demand for the country's products

United Kingdom

Which of the following countries has not adopted the euro?

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

To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

Which of the following is an appropriate form of indirect intervention?

An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.

Which of the following is an example of economic exposure but not an example of transaction exposure?

Deviations from PPP are reduced in the long run.

Which of the following is indicated by research regarding purchasing power parity (PPP)?

Which of the following is not a goal of the International Monetary Fund (IMF)? a. To promote cooperation among countries on international monetary issues b. To promote stability in exchange rates c. To enhance a country's long-term economic growth via the extension of structural adjustment loans d. To promote free trade e. To promote free mobility of capital funds across countries

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

Which of the following is not true regarding IRP, PPP, and the IFE?

all of the ABOVE

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

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

Which of the following operations benefit(s) from depreciation of the firm's local currency?

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

Which of the following reflects a hedge of net paybles on British pounds by a U.S firm?

theory of comparative advantage.

Which of the following theories identifies specialization as a reason for international business?

purchasing power parity (PPP)

Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?

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

increase; decrease

Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.

Foreign acquisitions

___ are most commonly classified as a direct foreign investment.

____ is (are) income received by investors on foreign investments in financial assets (securities). a. Portfolio income b. Direct foreign income c. Unilateral transfers d. Factor income

The local (domestic) earnings of the MNC

____ is (are) not a determinant of translation exposure

Fully benefiting from economies of scale

____ is not a revenue-related motive for direct foreign investment.

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

____ represent aid, grants, and gifts from one country to another. a. Transfer payments b. Factor income c. The balance of trade d. The balance of payments e. The capital account

Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound. a. increase; postpone remitting earnings until the pound strengthens b. decrease; postpone remitting earnings until the pound strengthens c. decrease; remit earnings immediately before the pound strengthens d. increase; remit earnings immediately before the pound strengthens

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true? a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan. b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain. c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries. d. B and C

More than 50% of the DFI by U.S. firms is in Mexico. a. True b. False

When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low. a. True b. False

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

Which of the following is not a forecasting technique mentioned in your text? a. Accounting-based forecasting b. Technical forecasting c. Fundamental forecasting d. Market-based forecasting e. Mixed forecasting

a. Accounting-based forecasting

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

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

69. The ____, an accord among 117 nations, called for lower tariffs around the world. a. General Agreement on Tariffs and Trade (GATT) b. North American Free Trade Agreement (NAFTA) c. Single European Act of 1987 d. European Union Accord e. None of the above

a. General Agreement on Tariffs and Trade (GATT)

a. Hedging pound payables by selling pounds forward

68. Which of the following factors probably does not directly affect a country's capital account and its components? a. Inflation b. Interest rates c. Withholding taxes on foreign income d. Exchange rate movements e. All of the above will directly affect a country's capital account.

a. Inflation

23. 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). a. It could attempt to reduce its home currency's value. b. The government could require firms to engage in outsourcing. c. The government could require that its local firms pursue outsourcing. d. All of the above are mentioned.

a. It could attempt to reduce its home currency's value.

2. Transaction exposure refers to: a. The exposure of a firm's international contractual transactions over a given period to exchange rate variations b. The exposure of a firm's total cash flows over a period to exchange rate variations c. The exposure of a firm's consolidated financial accounts over a period to exchange rate variations d. The exposure of a firm's total cash receivables to exchange rate variations

a. The exposure of a firm's international contractual transactions over a given period to exchange rate variations

73. ____ represent aid, grants, and gifts from one country to another. a. Transfer payments b. Factor income c. The balance of trade d. The balance of payments e. The capital account

a. Transfer payments

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

a. 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. a. True b. False

a. 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 spot rate will provide similar forecasts. a. True b. False

a. True

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

a. 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. a. True b. False

a. True

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. a. True b. False

a. True

Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting. a. True b. False

a. True

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

a. True

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

a. True

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

a. True

Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate's implied standard deviation from the currency option pricing model. a. True b. False

a. True

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. a. True b. False

a. True

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. a. True b. False

a. True

Which of the following is not a method of forecasting exchange rate volatility? a. Using the absolute forecast error as a percentage of the realized value to improve your forecast. b. Using the volatility of historical exchange rate movements as a forecast for the future. c. Using a time series of volatility patterns in previous periods. d. Deriving the exchange rate's implied standard deviation from the currency option pricing model.

a. Using the absolute forecast error as a percentage of the realized value to improve your forecast

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

a. accounting-based forecasting

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 ____. a. appreciate; depreciate b. appreciate; appreciate c. depreciate; depreciate d. depreciate; appreciate

a. appreciate; depreciate

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

a. appreciation of yen's value over the next year

66. The ____ is the difference between exports and imports. a. balance of trade b. balance on goods and services c. balance of payments d. current account e. capital account

a. balance of trade

18. The primary component of the current account is the: a. balance of trade. b. balance of money market flows. c. balance of capital market flows. d. unilateral transfers.

a. balance of trade.

32. Direct foreign investment into the U.S. represents a ____. a. capital inflow b. trade inflow c. capital outflow d. trade outflow

a. capital inflow

The Basel II accord is focused on eliminating inconsistencies in ____ across countries. a. capital requirements b. deposit rates c. deposit insurance d. bank failure policies

a. capital requirements

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

a. decrease; increase

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: a. depreciation in the Australian dollar's value over the next year. b. appreciation in the Australian dollar's value over the next year. c. no change in the Australian dollar's value over the next year. d. information on future interest rates is needed to answer this question.

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

a. direct; indirect

47. A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions. a. does; does b. does; does not c. does not; does not d. does not; does

a. does; does

a. fixed within narrow boundaries.

Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate? a. fundamental forecasting. b. market-based forecasting. c. technical forecasting. d. mixed forecasting.

a. fundamental forecasting

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

a. hedging.

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. a. higher; buy; upward b. higher; sell; downward c. higher; sell; upward d. lower; buy; upward

a. higher; buy; upward

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

a. increased for most major countries.

a. international money; international credit

21. Which is not a concern about the North American Free Trade Agreement (NAFTA)? a. its impact on U.S. inflation. b. its impact on U.S. unemployment. c. lower environmental standards in Mexico. d. different health laws for workers in Mexico.

a. its impact on U.S. inflation.

When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n): a. lagged input. b. instantaneous input. c. simultaneous input. d. B and C

a. lagged input

Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (? and the Australian dollar (A$). Listed below are ) the forecasted and realized values for the last period: Currency Australian dollar Japanese yen Forecasted Value $.60 $.0067 Realized Value $.55 $.0069 According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar. a. more accurate than b. less accurate than c. more biased than d. the same as

a. more accurate than

a. obtain a 90-day forward purchase contract on Canadian dollars.

Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate. a. overestimated b. underestimated c. correctly estimated d. none of the above

a. overestimated

A fundamental forecast that uses multiple values of the influential factors is an example of: a. sensitivity analysis. b. discriminant analysis. c. technical analysis. d. factor analysis.

a. sensitivity analysis

a. short-term lending (one year or less).

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. a. technical forecast technique b. fundamental forecast technique c. all of the above d. none of the above

a. technical forecast technique

a. the equivalent of $1 million or more.

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

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

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: a. weak-form efficient. b. semistrong-form efficient. c. strong-form efficient. d. all of the above.

a. weak-form efficient

To diversify internationally for the purpose of reducing risk, which strategy is appropriate?

a. Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

____ is not a revenue-related motive for direct foreign investment.

a. Fully benefiting from economies of scale

Which of the following is not a cost-related motive of direct foreign investment?

a. International diversification.

Which of the following is a reason to consider international business? a. all of the above b. exploit monopolistic advantages. c. economies of scale. d. diversification.

a. all of the above

Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.

a. decrease; remit earnings immediately before the euro weakens

To exploit monopolistic advantages, an MNC should:

a. establish subsidiaries in markets where competitors are unable to produce the identical product.

Assume that a bank's bid rate on Singapore Dollar is $.726 and its ask rate is $.738 Its bid-ask percentage spread is:

about 1.63%. bid ask spread in percentages =(ask-bid)/ask

Which of the following is not a forecasting technique mentioned in your text?

accounting-based forecasting.

You will get more diversification... across industries than across countries. across countries than across industries. across stocks and bonds than across countries. none of the above

across countries than across industries.

Advantages of investing in mutual funds known as country funds include: Speculation in a single foreign market at minimum cost. Using them as building blocks of a personal international portfolio. Diversification into emerging markets that are otherwise practically inaccessible. All of the above

all of the above

93. If the U.S. dollar appreciates,

an MNC's U.S. sales will probably decrease.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

an increase U.S demand for Euros and decreased supply of euros for sale

Assume that U.S. inflation increased while Germany's inflation stayed the same, there would be:

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

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 ____.

appreciate; depreciate

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 U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.

appreciation; 1.2

6. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

are not; are not

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

are not; are not

A firm will likely benefit most from diversifying if: a. the correlations between country economies are high. b. the correlations between country economies are low. c. the variability of all country economy levels is high. d. B and C

Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)? a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances. b. Host governments generally perceive DFI as a remedy to eliminate a country's political problems. c. The ability of a host government to attract DFI is dependent on the country's markets and resources. d. Some types of DFI will be more attractive to some governments than to others. e. All of the above are true.

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

b. False

b. $0.021

The most recent quarterly percentage change in the inflation differential is ?5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is a. 4.60%. b. 1.80%. c. 5.2%. d. 4.60%. e. None of the above

b. 1.80%

Using this information, the forecast for the percentage change in the ringgit is: a. 4.60%. b. 1.80%. c. 5.2%. d. 4.60%. e. none of the above

b. 1.80%

The one-year forward rate of the British pound is $1.55, while the current spot rate is $1.60. Based on the forward rate, what is the expected percentage change in the British pound over the next year? a. +5.0% b. ?3.1% c. +3.1% d. +3.2% e. None of the above

b. 3.1%

Certificates representing bundles of stock of non-U.S. firms are called: a. Eurobonds b. ADRs c. FRNs d. Eurobor

b. ADRs

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. a. True b. False

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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

b. False

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. a. True b. False

b. False

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

b. False

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

b. False

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

b. False

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. a. True b. False

b. False

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

b. 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. a. True b. False

b. False

29. Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization (WTO) d. International Development Association (IDA) e. Bank for International Settlements (BIS)

b. International Financial Corporation (IFC)

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

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

1. Economic exposure refers to: a. The exposure of a firm's international contractual transactions over a given period to exchange rate variations b. The exposure of a firm's total cash flows over a period to exchange rate variations c. The exposure of a firm's consolidated financial accounts over a period to exchange rate variations d. The exposure of a firm's total cash receivables to exchange rate variations

b. The exposure of a firm's total cash flows over a period to exchange rate variations

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? a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable. b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate. d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

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

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

b. depreciate by .8%; tomorrow

Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years. a. appreciate; 16.22 b. depreciate; 16.22 c. appreciate; 6.66 d. depreciate; 6.66 e. none of the above

b. depreciate; 16.22

b. depreciate; selling

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

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

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

b. downward

8. The World Bank was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

b. enhance economic development through non-subsidized loans (at market interest rates).

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

b. focus on a single point estimate of future exchange rates

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

b. forecasts are needed for factors that have a lagged impact.

Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting. a. technical b. fundamental c. market-based d. none of the above

b. fundamental

3. 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). a. decrease b. increase c. remain unaffected d. either A or C are possible

b. increase

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

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

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

b. increased; decreased

b. indirect; 142.86

b. less liquid than markets for developed countries.

If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds. a. derivative b. long-term credit c. money d. foreign exchange

b. long-term credit

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

b. lower in the U.S. than in European countries.

22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for: a. increased trade restrictions outside of North America. b. lower trade restrictions around the world. c. uniform environmental standards around the world. d. uniform worker health laws.

b. lower trade restrictions around the world.

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. a. lower; sell; upward b. lower; sell; downward c. higher; sell; upward d. higher; sell; downward

b. lower; sell; downward

Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate? a. fundamental forecasting. b. market-based forecasting. c. technical forecasting. d. mixed forecasting.

b. market-based forecasting

Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate? a. fundamental forecasting. b. market-based forecasting. c. technical forecasting. d. mixed forecasting.

b. market-based forecasting

b. medium-term lending.

19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated. a. member countries and the U.S. b. member countries c. member countries and European non-members d. none of the above

b. member countries

b. more standardized; custom-tailored

b. obtain a 90-day forward sale contract on euros.

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

b. overestimated the future exchange rates over time.

55. Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____. a. reduce; flipping b. reduce; pirating c. increase; pirating d. increase; flipping

b. reduce; pirating

Foreign exchange markets are generally found to be at least ____ efficient. a. weak-form b. semi-strong form c. strong form d. none of the above

b. semi-strong form

According to the text, the analysis of currencies forecasted with use of the forward rate suggests that: a. currencies exhibited about the same mean forecast errors as a percent of the realized value. b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies. c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies. d. none of the above

b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies

24. The demand for U.S. exports tends to increase when: a. economic growth in foreign countries decreases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above.

b. the currencies of foreign countries strengthen against the dollar.

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

b. the international Fisher effect (IFE) is supported

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

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

b. the transaction cost of foreign exchange.

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. a. overestimated b. underestimated c. correctly estimated d. none of the above

b. underestimated

If a foreign currency is expected to ____ substantially against the parent's currency, the parent may prefer to ____ the remittance of subsidiary earnings. a. weaken; delay b. weaken; expedite c. appreciate; expedite d. none of the above

b. weaken; expedite

____ is not a disadvantage of direct foreign investment. a. Political risk b. All of the above are disadvantages of direct foreign investment. c. The expense of establishing a foreign subsidiary d. The uncertainty of inflation and exchange rate movements

b. All of the above are disadvantages of direct foreign investment.

A country with high unemployment could best increase its employment by:

b. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.

To fully benefit from economies of scale, an MNC should:

b. establish a subsidiary in a new market that can sell products produced elsewhere.

The best way to accomplish the revenue-related motive of attracting new sources of demand is to:

b. establish a subsidiary or acquire a competitor in a new market

If countries' economies are highly integrated, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries whose economies are less integrated.

b. high and positive; less

An MNC's cash flows are likely to be less volatile if its percentage of foreign sales is ____ and the number of foreign countries it sells products to is ____.

b. high; large

The ____ is the difference between exports and imports.

balance of trade

The primary component of the current account is the

balance of trade

What is exports minus imports called.

balance of trade

the ______________ is the difference between exports and imports

balance of trade

the primary component of the current account is the

balance of trade

34. 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; depreciated

13. Magent Co. is a U.S. company that has exposure to the Swiss francs (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:

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

Magent Co. is a U.S. company that has exposure to the Swiss francs (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:

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

67. 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:

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

7. Which of the following operations benefits from appreciation of the firm's local currency?

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

Direct foreign investment is perceived by foreign governments to: a. be a cause of national problems. b. be a remedy for national problems. c. either A or B is possible. d. have no impact on national problems.

Direct foreign investment would typically be welcomed if: a. the products to be produced are substitutes for other locally produced products. b. people from the country of the company's headquarter are transferred to the foreign country to work at the subsidiary. c. the products to be produced are going to be exported. d. all of the above

The ____ a project's variability in cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project. a. higher; higher b. higher; lower c. lower; lower d. lower; higher

When a firm analyzes the feasibility of a project, it should consider the: a. variability of the project's cash flow. b. correlation of the project's cash flow relative to the prevailing cash flows of the MNC. c. A and B d. none of the above

There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____. a. 4.5%; 6.1%; b. 6.1%; 4.5% c. 4.5%; 5.3% d. None of the above

c. 4.5%; 5.3%

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

c. $.52/$.51

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

c. $.856

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 $____. a. 1.02 b. 1.03 c. 1.04 d. none of the above

c. 1.04

c. 793,651 Solve: 100,000/.126 = 793,650.79

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 ____%. a. 9.6 b. 9.6 c. 8.8 d. 8.8

c. 8.8

A forward contract can be used to lock in the ____ of a specified currency for a future point in time. a. purchase price b. sale price c. A or B d. none of the above

c. A or B

8. In general, a firm that concentrates on local sales, faces very little foreign competition, and that obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ of the local currency. a. Be hurt by; appreciation b. Benefit from; depreciation c. Be hurt by; depreciation d. None of the above

c. Be hurt by; depreciation Since the firm imports foreign raw materials, its foreign currency denominated payables will increase with a depreciation of the local currency. Hence, will likely be hurt by a depreciation of the local currency.

4. Which of the following reflects a hedge of net receivables invoiced in GBP by a U.S. firm? a. Purchase a currency call option in GBP b. Purchase GBP forward c. Borrow GBP, convert these funds to USD, invest these in USD assets with same maturity as the receivables d. Both options a and b but not option c e. None of the above

c. Borrow GBP, convert these funds to USD, invest these in USD assets with same maturity as the receivables Three ways to hedge receivables: 1. buy GBP put 2. sell GBP forward 3. borrow GBP; coverT to USD;invest in USD with same maturity as receivables

c. Buy a pound put option

17. Which of the following countries purchases the largest amount of exports by U.S. firms? a. Mexico b. Japan c. Canada d. France

c. Canada

c. Purchase call option

3. Translation exposure refers to: a. The exposure of a firm's international contractual transactions over a given period to exchange rate variations b. The exposure of a firm's total cash flows over a period to exchange rate variations c. The exposure of a firm's consolidated financial accounts over a period to exchange rate variations d. The exposure of a firm's total cash receivables to exchange rate variations

c. The exposure of a firm's consolidated financial accounts over a period to exchange rate variations

74. Which of the following is not a goal of the International Monetary Fund (IMF)? a. To promote cooperation among countries on international monetary issues b. To promote stability in exchange rates c. To enhance a country's long-term economic growth via the extension of structural adjustment loans d. To promote free trade e. To promote free mobility of capital funds across countries

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

c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.

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 spot rate will provide ____ forecasts. a. substantial; similar b. substantial; very different c. close to zero; similar d. close to zero; very different

c. close to zero; similar

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

c. decrease; decrease

c. devalued relative to major currencies.

The forward market: a. for euros is very illiquid. b. for Eastern European countries is very liquid. c. does not exist for some currencies. d. none of the above

c. does not exist for some currencies.

9. The International Development Association was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

c. enhance economic development through low-interest rate loans (below-market rates).

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. a. spot; high b. spot; low c. forward; high d. forward; low

c. forward; high

Monson Co., based in the U.S., 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. a. higher; to hedge b. lower; not to hedge c. higher; not to hedge d. none of the above

c. higher; not to hedge

A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the U.S. and Canada was ?0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____. a. increases; increases b. decreases; increases c. increases; decreases d. increases; decreases

c. increases; decreases

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

c. large corporations.

56. 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 ____. a. low; small b. high; small c. low; large d. high; large

c. low; large

The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____. a. lower; volatile b. higher; stable c. lower; stable d. none of the above

c. lower; stable

c. prevailing prices in locations where the foreign exchange markets have been open.

Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? a. purchase Canadian dollars forward. b. purchase Canadian dollar futures contracts. c. purchase Canadian dollar put options. d. purchase Canadian dollar call options.

c. purchase Canadian dollar put options.

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

c. reduce

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

c. sold on an exchange; offered by commercial banks

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value? a. fundamental forecasting. b. market-based forecasting. c. technical forecasting. d. mixed forecasting.

c. technical forecasting

The ____ the variability of a project's cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project.

c. lower; lower

Direct foreign investment would typically be welcomed if:

c. the products to be produced are going to be exported.

When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.

c. undervalued; low

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.

can; cannot

Direct foreign investment into the U.S. represents a ____.

capital inflow

direct foreign investment into the US represents a

capital inflow

If you are trying to capitalize on interest rate differential of two currencies while at the same time hedging your risk with a forward contract, you are entering into a ____________.

covered interest arbitrage

13. The U.S. typically has a balance of trade surplus in its trade with ____. a. China b. Japan c. A and B d. none of the above

d. none of the above

21. Which of the following is not a form of exposure to exchange rate fluctuations?

credit exposure.

According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand. a. Paraguay b. Morocco c. Sweden d. China

Which of the following is a reason to consider international business? a. economies of scale. b. exploit monopolistic advantages. c. diversification. d. all of the above

____ is not a disadvantage of direct foreign investment. a. The expense of establishing a foreign subsidiary b. The uncertainty of inflation and exchange rate movements c. Political risk d. All of the above are disadvantages of direct foreign investment

which of the following reflects a hedge of net receivables in British pounds by a US firm? a) purchase a currency put option in British pounds b) sell pounds forward c) borrow US dollars, convert them to pounds, and invest them in a British pound deposit

d) A and B

which of the following reflects a hedge of net payables on British pounds by a US firm? a) purchase a currency put option in British pounds b) sell pounds forward c) sell a currency call option in British pounds d) borrow US dollars, convert them to pounds, and invest them in a British pound deposit. e) A and B

d) borrow US dollars, convert them to pounds, and invest them in a British pound deposit

The International Financial Corporation was established to:

enhance economic development of the private sector through investment in stock of corporations.

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is: a. $.860. b. $.848. c. $.740. d. $.752. e. none of the above

d. $.752

d. $47,500 5,000,000 yen * $.0095 = $47,500

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

d. A and B

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. a. weak-form efficiency b. semistrong-form efficiency c. strong-form efficiency d. A and B e. B and C

d. A and B

____ is not a factor that affects the bid/ask spread. a. Order costs b. Inventory costs c. Volume d. All of the above factors affect the bid/ask spread

d. All of the above factors affect the bid/ask spread

67. Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)? a. A decrease in the country's rate of inflation b. A decrease in the country's national income level c. An increase in government restrictions in the form of tariffs or quotas d. An appreciation of the country's currency e. All of the above will result in an increased current account balance.

d. An appreciation of the country's currency

4. ____ purchases more U.S. exports than the other countries listed here. a. Italy b. Spain c. Mexico d. Canada

d. Canada

d. Each country used gold to back its currency.

26. ____ is (are) income received by investors on foreign investments in financial assets (securities). a. Portfolio income b. Direct foreign income c. Unilateral transfers d. Factor income

d. Factor income

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

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

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

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

Which of the following is true according to the text? a. Forecasts in recent years have been very accurate. b. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias. c. Forecasting errors are smaller when focused on longer term periods. d. None of the above.

d. None of the above

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

d. None of the above

72. Which of the following would increase the current account of Country X? Country Y is Country X's sole trading partner. a. Inflation increases in countries X and Y by comparable amounts. b. Country X's and Country Y's currencies depreciate by the same amount. c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X's exports. d. The central banks of Country X and Country Y reduce the money supply to increase interest rates. e. Country X imposes a quota on imports, and Country Y retaliates by imposing an identical quota on X's exports.

d. The central banks of Country X and Country Y reduce the money supply to increase interest rates.

70. 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? a. The government of Country X eliminates environmental restrictions. b. The government of Country X subsidizes firms in its country to facilitate dumping. c. The government of Country X provides tax breaks to firms in specific industries. d. The government of Country X removes a tariff on goods imported from Country Y.

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

Which of the following is correct? a. The longer the time to maturity, the less the value of a currency call option, other things equal. b. The longer the time to maturity, the less the value of a currency put option, other things equal. c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

A multi-national firm's value depends on all of the following, except: a. MNC's required rate of return b. Amount of MNC's cash flows in particular currency c. The exchange rate at which cash flows are converted to dollars d. The value of MNC depends on all of the above factors

d. The value of MNC depends on all of the above factors

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

d. all of the above

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

d. all of the above

The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was ?1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%. a. appreciation; 3.4 b. depreciation; 3.4 c. appreciation; 0.7 d. appreciation; 1.2

d. appreciation; 1.2

Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? a. purchase a currency put option in British pounds. b. sell pounds forward. c. sell a currency call option in British pounds. d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. e. A and B

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

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

d. deficit

7. The International Financial Corporation was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations.

d. enhance economic development of the private sector through investment in stock of corporations.

d. exceeds $1 trillion

25. "Dumping" is used in the text to represent the: a. exporting of goods that do not meet quality standards. b. sales of junk bonds to foreign countries. c. removal of foreign subsidiaries by the host government. d. exporting of goods at prices below cost.

d. exporting of goods at prices below cost.

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

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

An obligation to purchase a specific amount of currency at a future point in time is called a: a. call option b. spot contract c. put option d. forward contract e. both B and D

d. forward contract

51. In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China. a. small; surplus b. large; surplus c. small; deficit d. large; deficit

d. large; deficit

d. less stringent accounting requirements.

57. Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level. a. more; lower b. more; higher c. less; lower d. less; higher

d. less; higher

d. none of the above

14. The North American Free Trade Agreement (NAFTA) increased restrictions on: a. trade between Canada and Mexico. b. trade between Canada and the U.S. c. direct foreign investment in Mexico by U.S. firms. d. none of the above.

d. none of the above.

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

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

d. to speculate on the exchange rate movements

Procedural and documentation requirements imposed by the foreign government on an MNC pursuing DFI are referred to as:

d. "red tape" barriers.

To enter markets where superior profits are possible, an MNC should:

d. acquire a competitor that has controlled its local market.

Direct foreign investment is commonly considered by MNCs because it allows the MNC to:

d. attract new sources of demand.

Assume a U.S. MNC initiates direct foreign investment in the United Kingdom. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.

d. increase; postpone remitting earnings until the pound strengthens

When economic conditions of two countries are ____, an MNC would ____ its risk by operating in both countries instead of concentrating just in one

d. not highly correlated; reduce

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:

decrease local sales as foreign competition in local markets is reduced. decrease the firm's exports denominated in the local currency. decrease the returns earned on the firm's foreign bank deposits. decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. none of the above

A high home inflation rate relative to other countries would ___ the home country's current account balance other things equal. A high growth in the home income level relative to other countries would ___ the home country's current account balance.

decrease; decrease

An increase inflation rate for the United States relative to other countries would ____ the US's current account balance, other things equal. An increase growth in the US income level relative to other countries would ____ the US's current account balance, other things equal

decrease; decrease

decrease; increase

Recently, the U.S experienced an annual balance of trade representing a

deficit

recently, the us experienced an annual balance of trade representing a

deficit

direct; indirect

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

discount; 1.8

If the U.S. interest rate is 7% and Canada interest rate is 11%. Assume that interest rate parity holds, the forward rate on the Canadian dollar exhibits a ____ of ____ percent.

discount; 3.60

A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.

does; does

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.

dollars; foreign country

An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.

downward

An increase in the current account deficit will place _________ pressure on the hoem currency value, other things being equal

downward

e. $.174

5. Which of the following reflects a hedge of net payables invoiced in GBP by a U.S. firm? a. Purchase a currency call option in GBP b. Purchase GBP forward c. Borrow USD, convert these funds to GBP, invest these in GBP assets with same maturity as the payables d. Both options a and b but not option c e. All of the above

e. All of the above

e. All of the above are important bank characteristics to customers in need of foreign exchange.

e. All of the above are methods that can be used to invest internationally.

31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization d. International Development Association (IDA) e. Bank for International Settlements (BIS)

e. Bank for International Settlements (BIS)

7. A domestic firm produces goods which compete in both the domestic and foreign markets with foreign produced substitutes. Appreciation of the domestic currency will likely: a. Increase the firm's domestic sales by reducing the competitiveness of foreign substitutes b. Increase the firm's foreign sales c. Increase the firm's cash outflows for foreign raw materials invoiced in foreign currencies d. Increase net returns earned on the firm's foreign bank deposits e. None of the above

e. None of the above Appreciation of domestic currency will likely lower the domestic price of imported substitutes, which is good for foreing substitutes BUT This also raises the foreign currency price of the firm's product (lowering foreign sales) Overall this decreases the form's cash outflows for foreign raw materials and decreases the net returns on foreign assets when these are converted into the domestic currency

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

e. a tax on income earned from foreign stocks.

e. all of the above.

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

e. offers various forms of political risk insurance.

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:

economic exposure.

71. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

economic exposure.

"Dumping" is used in the text to represent the:

exporting of goods at prices below cost

the term "dumping" refers to the

exporting of goods at prices below cost

6. Generally, MNCs with lower foreign costs than foreign revenues will be ____ impacted by a ____ foreign currency. a. Favorably; stronger b. Adversely; stronger c. Favorably; weaker d. Adversely; weaker e. Options b and c f. Options a and d

f. Options a and d MNC has net receivables denominated in foreign currencies (Fc< Fr). As a result, it will be favorably impacted by a stronger foreign currency And Adversely affected by a weak foreign currency

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

false

a balance of trade surplus indicates an excess of imports over exports

false

a weakening of the US dollar with respect to the British pound would likely reduce US exports to increase US imports from Britain over time

false

14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.

favorably; stronger

68. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.

favorably; weaker

Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCFt = a0 + a1et + Ut 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%.

77. Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

increase

A nation's government imposed a tariff on imported goods, the current account balance will

increase

If a country's government imposes a tariff on imported goods, that country's current account balance will likely

increase

if a country's government imposes a tariff on imported goods, that country's current account balance (assuming no retaliation by other governments) will likely

increase

16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

increase local sales as it reduces foreign competition in local markets. increase the firm's exports denominated in the local currency. increase the returns earned on the firm's foreign bank deposits. increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. none of the above

An increase in the use of quotas is expected to:

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

An increase in the use of quotas is expected to

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

increase; postpone remitting earnings until the pound strengthens

If U.S. decreases their interest rates relative to Spain this would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.

increase; reduce

76. 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

Over the last several years, international trade (exports plus imports) as a percentage of GDP has generally:

increased for most major countries

the direct foreign investment positions by US firms have generally __________ over time. Restrictions by governments on direct foreign investment have generally ______ over time

increased, decreased

The direct foreign investment positions by U.S. firms have generally ____ over time; the direct foreign investment positions in the U.S. by non-U.S. firms have generally ____ over time.

increased; increased

The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.

index

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?

international Fisher effect (IFE)

8. Which of the following operations benefit(s) from depreciation of the firm's local currency?

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

24. One argument for exchange rate irrelevance is that:

investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.

Which is not a concern about the North American Free Trade Agreement (NAFTA)?

its impact on U.S. inflation.

in record years, the United States has had a relatively (compared to other countries) _______ balance of trade _______ with China

large, deficit

In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China.

large; deficit

Interest rate parity assumes that 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.

without international capital flows, there would be ________ funding available in the United States across all risk levels, and the cost funding would be ____ regardless of the firm's risk level

less, higher

Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level.

less; higher

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 _______

low, large

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 ____.

low; large

According to the text, international trade (exports plus imports combined) as a percentage of GDP is:

lower in the U.S. than in European countries

the general agreement on tariffs and trade (GATT) accord of 1993 called for

lower trade restrictionds around the world

A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:

lower trade restrictions around the world.

The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal.

lower; lower

lower; sell; downward

The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.

lower; stable

Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate?

market-based forecasting.

Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

market-based forecasting.

As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.

member countries

as a result of the European union, restrictions on exports between _______ were reduced or eliminated

member countries

Which of the following is the least effective way of hedging exposure in the long run?

money market hedge

The World Bank's Multilateral Investment Guarantee Agency (MIGA):

offers various forms of political risk insurance.

69. 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; gross profit

19. 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 its 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

from the perspective of Detroit Co., which has payables in Mexican pesos and receiveables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.

negative; negative

26. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC's transaction exposure is relatively ____.

negatively; low

the north American free trade agreement (NAFTA) increased restrictions on

none

the united states typically has a balance of trade surplus in its trade with _________

not china or japan

A call option on New Zealand dollars has a strike (exercise) price of $.59. The present exchange rate is $.56. This call option can be referred to as:

out of the money

If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:

overestimated the future exchange rates over time.

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

18. 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 ____.

positive; gross profit

70. 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 ____.

positive; gross profit

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:

positve

purchasing euro call options

If salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:

purchasing put options

2. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:

purchasing yen put options

reduce

Which one is not a major objective of the International Monetary Fund (IMF)?

reduce extreme poverty levels.

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 US balance-of-trade surplus with Thor. This activity is called __________

reduce, piracy

Assume the U.S. has a balance of trade surplus with the Country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____.

reduce; pirating

33. Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

reduction; reduction

Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

reduction; reduction

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

remain unhedged

15. 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 ____ affected.

unfavorably; favorably affected

_________ represents aid, grants, and gifts from one country to another

secondary income

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

sell a euro call and buy a euro put

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:

sell euros forward

If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

selling; selling

Foreign exchange markets are generally found to be at least ____ efficient.

semistrong-form

While futures and forwards are similar a difference is that futures contracts are ____; while forward contracts are ____.

sold on an exchange; offered by commercial banks

66. 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, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.

stay the same; stay the same

11. 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.

strong dollar; favorably

Which forecasting techniques tries to find reoccurring patterns using historical data to predict future currency value?

technical forecasting

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?

technical forecasting.

With regard to the OIP

the composition of the optimal international portfolio is identical for all investors of a particular country, whether or not they hedge their risk with currency futures contracts.

With regard to the OIP

the composition of the optimal international portfolio varies depending upon the numeraire currency used to measure returns.

the demand for US exports tends to increase when

the currencies of foreign countries strengthen against the dollar

The demand for U.S. exports tends to increase when:

the currencies of foreign countries strengthen against the dollar.

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:

the current level of interest rates.

3. Economic exposure refers to:

the exposure of a firm's cash flows to exchange rate fluctuations.

Economic exposure refers to:

the exposure of a firm's cash flows to exchange rate fluctuations.

1. Translation exposure reflects:

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

2. Transaction exposure reflects:

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

Transaction exposure reflects:

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

72. 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 real cost of hedging payables with a forward contract equals:

the nominal cost of hedging minus the nominal cost of not hedging.

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 "J curve" effect describes:

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

According to the international fisher effect, if interest rates on the British pound are consistently below U.S. interest rates, then:

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

75. 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 Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

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

10. Under FASB 52:

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

outsourcing allows some MNCs to reduce costs but shifts jobs to other countries

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

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

regarding the US balance of payments, capital account items are relatively minor compared to the financial account items

true

the balance of payments is a summary of all transactions between domestic and foreign residents for country over a specified period of time

true

the sale of patent rights by a US firm to a Russian firm reflects a credit to the US balance of payments account

true

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

Gamma Corporation 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 to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft − 1 + μt, 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.

underestimated

According to the text, research generally supports ____ in foreign exchange markets

weak-form efficiency & semistrong-form efficiency Both A&B

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.

12. 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; somewhat stable

The degree of "home bias" varies across investors

wealthier, more experienced, and sophisticated investors are less likely to exhibit home bias.

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:

Final 2

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