Principles of Finance - Last Chapters

(Select all that apply) Which of the following should be viewed as complements to formal analysis?

Intuition Instinct Experience

In an efficient market, prices _____ information.

fully reflect available

The foreign exchange market ___.

is an over-the-counter market

If an international firm borrows money in the foreign country where it has operations it can reduce ___.

long-run exchange rate exposure

Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___.

long-term exposures to exchange rate risk

Index funds are _____ managed.

passively

The theory that real interest rates are equal across countries is called _________.

the international Fisher effect

Mutual fund managers usually _______ the market.

underperform

A bubble _____.

usually lasts longer than a crash

A bubble occurs when market prices soar far in excess of _____.

what rational analysis would suggest

You are susceptible to framing effects if your _________ depends on how the problem or question is framed.

decision

A security issued in the United States that represents shares of a foreign stock is called a(n) ___.

ADR

Which of the following transactions is equivalent to entering a forward contract for an importing firm?

Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract

True or false: Mutual fund managers are worth any extra costs because they historically tend to overperform the market.

F

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

London; London

The _______ rate is generally used for the U.S. nominal risk-free rate (RUS).

T-bill

True or false: The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits.

True

Which of the following are ways for a U.S. corporation to reduce political risk in a foreign country?

Use local financing

Being able to recognize situations where mistakes are often made will allow you to become _____.

a better decision maker

Exploiting a disequlibrium between spot rates, forward rates, and differences in interest rates is called _____.

covered interest arbitrage

Absolute purchasing power parity should hold more closely for items that are ___.

easily transported

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

indirect

Carl bought 400 shares of XYZ stock several years ago and has made money on the investment. He believes that it is time to sell the stock, but he has unwittingly become attached to XYZ corporation and is hesitant to sell it. Carl is engaged in _____.

mental accounting

Focusing on gains and losses instead of one's overall wealth is an example of _____, which leads to a phenomenon called loss aversion.

narrow framing

One of the implications of the representativeness heuristic has to do with _____.

perceiving patterns where none exist

A _____ is an agreement to exchange two securities or currencies.

swap

Kayla took two dice and rolled a twelve three times in a row. Jamie thought that was very unusual and accused Kayla of using loaded dice. Jamie is suffering from _____.

the clustering illusion

The unbiased forward rate condition may not hold if ___.

traders in the forward market are willing to pay a premium to avoid uncertainty

(Select all that apply) Which of the following are correct when describing purchasing power parity?

-Purchasing power parity is a major factor in the rate of change in exchange rates. -Exchange rates adjust to keep purchasing power level between currencies. -Parity is expressed as both absolute and relative.

The Tax Cuts and Jobs Act of 2017 introduced a new flat tax rate of _____ percent which reduced the incentive for companies to leave cash overseas. (Enter a numerical value in the blank.)

21

Which of the following agreements is a spot exchange rate for the Norwegian krone?

6NKr for $1 settled in 2 days

Which of the following is an example of loss aversion?

Avoiding debt financing because it increases the likelihood of bankruptcy.

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

foreign

The London Interbank Offer Rate is the cornerstone in pricing money markets and short-term debt because ___.

interest rates are usually quoted as some spread over this rate

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

nominal

The belief that your abilities are better than they really are is called _____.

overconfidence

The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as ______.

purchasing power parity

Systematic biases usually lead to _____.

systematic errors in judgment

(Select all that apply) Which of the following refer to a firm with a large portion of its business outside of its parent country?

An international corporation A multinational

Gilts are securities issued by the ___.

British and Irish governments

True or false: The efficient markets hypothesis (EMH) requires every investor to be rational.

F

Bonds that are issued in a single country and are usually denominated in that country's currency are called _____.

Foreign Bonds

(Select all that apply) The different types of exchange rate risk include which of the following?

Long-term exposure Translation exposure Short-term exposure

What are some strategies for hedging long-term exchange rate risk?

Matching foreign currency inflows and outflows

(Select all that apply) Which of the following scenarios are positively framed?

Most people graduate from high school. The medicine provoxaria has cured over 100,000 individuals.

(Select all that apply) Which of the following are conditions necessary for absolute purchasing power parity?

No transaction costs No trade barriers Identical goods

Which of the following is not a systematic bias?

Overaccuracy

Jonas Barbera only hires people from rural areas to work in his grocery store because he believes that people who have been raised in a rural environment have a strong work ethic. Which type of heuristic is Jonas falling prey to in his hiring decisions?

The representative heuristic

Dollar _______ occurs when the value of a dollar rises and it takes more foreign currency to buy a dollar.

appreciation

What is the implicit exchange rate between two currencies when both are quoted in a third currency?

cross-rate

An agreement to trade currencies within two business days at today's exchange rate is called a _____ trade.

spot

When a U.S. company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to ___ exposure to exchange rate risk.

TRANSLATION

The number of U.S. dollars required to buy one unit of foreign currency is referred to as ___.

a direct quote

Corporations with significant foreign operations are often called ___.

multinationals

The tendency to focus on avoiding short-term losses, even at the expense of long-term gains is called _____.

myopic loss aversion

Relative purchasing power parity says that the expected percentage change in an exchange rate is equal to the difference in the ____ rates between the two countries.

inflation

The affect heuristic is the reliance on __________ when making decisions.

instinct

When two parties exchange a floating rate payment for a fixed rate payment, it is called a(n) _____ swap.

interest rate

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

¥90

(Select all that apply) Which of the following are true concerning triangle arbitrage?

-It helps keep the currency market in equilibrium. -Arbitrage opportunities can exist in either the spot or the forward markets. -It is a profitable situation involving three separate currency exchange transactions.

(Select all that apply) Which of the following are reasons why arbitrage might not be able to correct mispricings in the market?

Firm specific risk Noise trader risk Implementation costs

(Select all that apply) A person who uses the representative heuristic to form an opinion about an entire class or group relies on _____.

analogies limited samples stereotype

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

arbitrage

Which method employs uncovered interest parity to project future exchange rates?

The home currency approach

FASB 52 requires that assets and liabilities be translated at the current exchange rate and that the gains and losses be recorded ____.

against shareholders' equity

(Select all that apply) Business wisdom begins with _____.

cutting down on financial damage caused by poor decisions recognizing the circumstances that lead to poor decisions

One of the most significant complications faced daily by multinationals is ______.

foreign exchange

A ______ trade is an agreement to exchange currency at some time in the future.

forward

The use of _______ exchange agreements can help reduce the short-term exposure to exchange rate risk.

forward

British and Irish government securities are called _____.

gilts

The ______ of one currency based on another country's currency is known as the exchange rate.

price

Absolute purchasing power parity tells us that ___.

$1 will buy you the same number of tangerines anywhere in the world

Funds from a foreign subsidiary that cannot currently be remitted are sometimes said to be ___.

blocked

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

Brazil would rise and their returns would fall

An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called ____.

a forward trade

True or false: On average, men outperform women when it comes to investing.

False

What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?

LIBOR

Why is it more challenging to manage long-term exchange rate risk exposure than to hedge short-term risks?

Organized forward markets do not exist for long-term needs of corporations.

The world's largest financial market is the _____ market.

foreign exchange

When it is reported that the dollar is stronger in the foreign exchange market it means that ___.

the dollar is more valuable and can buy more of other currencies

______ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies, thus eliminating any arbitrage possibilities.

IRP Interest Rate Parity

Match each error or bias to its description.

Recency bias: This bias occurs when someone gives more weight to new information and less weight to old information. Aversion to ambiguity: This bias results from shying away from the unknown. Anchoring and adjustment: This occurs when someone can't account for new information correctly. False consensus: The tendency to think others is thinking the same thing you are thinking.

(Select all that apply) A foreign subsidiary can remit funds to the parent company in which of the following ways?

Royalties Management fees Dividends

(Select all that apply) Which of the following are examples of overconfidence?

Trading stocks excessively because you believe you make excellent stock picks Believing you can forecast the future with precision

The implicit exchange rate between two currencies when both are quoted in a third currency is called the ____.

cross-rate

_________ PPP explains the exchange rate change over time.

Relative

Interest rate parity ___.

eliminates covered interest arbitrage opportunities

A _____ is a bond issued in multiple countries, but denominated in a single currency, typically the issuer's home currency. (Enter one word in the blank.)

eurobond

International ______ rates, interest rates, and inflation rates are closely related.

exchange

The international Fisher effect asserts that ______ interest rates are equal across countries.

real

The tendency to consider something that you own to be worth more than it would be if you did not own, it is called _____.

endowment effect

(Select all that apply) Conditions that must be present for absolute purchasing power to exist include which of the following?

The goods must be identical. There must be no trade barriers.

The use of local financing from the government of the foreign country where the operation is located ___.

can reduce political risk

Searching for information and that reinforces what you believe rather than seeking information to the contrary is called _____ bias.

confirmation

Human errors and other aspects of human behavior that affect financial management fall under the rubric of _____.

behavioral finance

(Select all that apply) Users of the foreign exchange market include ___.

-foreign exchange brokers who match buy and sell orders -speculators who try to profit from changes in exchange rates -importers who pay for goods using foreign currencies

(Select all that apply) The foreign currency approach to capital budgeting analysis _____.

-produces the same results as the home currency approach -is computationally easier than the home currency approach -computes the NPV of a project in both the foreign and domestic currency

If purchasing power parity did not hold, it would be possible to engage in _______ by transporting products to other countries.

arbitrage

The natural consequences of international operations in a world where relative currency values move up and down is called ____.

exchange rate risk

Justin trades stocks based on the barometric pressure in Fargo, North Dakota. Justin is _____.

a noise trader

Match the international corporate finance terminology below with its correct definition. Instructions

ADR: A security issued in the US that represents shares of a foreign stock Cross-rate: The implicit exchange rate between two currencies quoted in a third currency Eurobond: A bond issued in multiple countries but denominated in a single currency Eurocurrency: Money deposited in a financial center outside of the country with the involved currency

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

False

True or false: Political risk refers only to problems for U.S. companies caused by foreign governments.

False

Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks?

Short-run exposure to exchange rate risk

(Select all that apply) The three main categories of cognitive errors include _____.

biases framing effects heuristics

In decision making, the tendency to focus on information that agrees with your opinion and ignore information that doesn't support your opinion is known as _____.

confirmation bias

If U.S. dollars are deposited in banks outside the U.S. banking system, they are referred to as ___.

EUrocurrency

The price of one country's currency expressed in terms of another country's currency is called the ___.

EXCHANGE rate

Changes in the value of international investments due to the actions of governments is referred to as ______ risk.

political

Match the following currencies to their country of origin. Instructions

India: rupee Japan: Yen Mexico: Peso Canada: Dollar UK: Pound Switzerland: franc

The day-to-day fluctuations in exchange rates create _____ exposure.

short-term exchange rate risk

Mutual fund managers and mutual funds that perform poorly usually disappear. This phenomenon is known as _____.

survivorship bias

The _____ interest parity is the condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates.

uncovered

Money deposited in a financial center outside the country whose currency is involved is called ___.

Eurocurrency

Overconfidence is not the same as overoptimism because overconfident individuals can _____.

be overconfident in their pessimistic forecasts

Heuristics are simply shortcuts or _____.

rules of thumb

Neal doesn't have time to analyze stocks so he only purchases stocks that have recently experienced stock splits. Neal is relying on mental shortcuts or _________ to select stock.

heuristics

After an hour of gambling Lester's winnings totaled $100, but then he made a risky bet and lost $90. Lester was not upset because he felt that the money he lost in the risky bet was _____.

house money

(Select all that apply) In the context of capital budgeting, an overly optimistic analysis will consistently _____.

overestimate cash flows underestimate the probability of failure

_____ arbitrage is a profitable situation involving three separate currency exchange transactions.

triangle

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called ___.

uncovered interest parity

It has been found that trading accounts registered to men _____ (underperform/overperform) those registered to women.

underperform

A bond issued in multiple countries, but denominated in a single currency is called _____.

Eurobond

(Select all that apply) What are some ways in which a foreign subsidiary can remit cash flows to a parent?

Dividends Management fees for central services Royalties for the use of trade names and patents

The management of exchange rate risk should probably be centralized so that the firm has an understanding of ___.

its overall positions in foreign currency