FINA 3330 Dr. Luo- International Finance Final Exam Ch. 1-14
The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z. a. more; more b. less; less c. more; less d. less; more
C
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: a. $0.0076. b. $0.0073. c. $0.0070. d. $0.0066.
C
The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal. a. greater; greater b. greater; lower c. lower; lower d. lower; greater
C
The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00
C
To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities. a. buy; sell b. sell; buy c. buy; buy d. sell; sell
C
Translation exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.
C
Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and: a. the income differential. b. the forward discount or premium. c. the inflation differential. d. none of the above
C
Which of the following operations benefit(s) from depreciation of the firm's local currency? a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. b. purchasing foreign supplies. c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. d. A and B
C
Which of the following statements is incorrect? a. Transaction exposure represents only the exchange rate risk when converting net foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send payments. b. Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows. c. Firms can simply focus on hedging their foreign currency payables and/or receivables to hedge economic exposure. d. The management of economic exposure tends to serve as a long-term solution rather than just a short-term solution.
C
It shows the net change in physical or financial assets ownership for a nation; it includes foreign direct investment, portfolio and other investments, plus changes in the reserve account
Capital Account
Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____. a. decreasing foreign revenues; decreasing foreign expenses b. decreasing foreign revenues; increasing foreign expenses c. increasing foreign revenues; decreasing foreign revenues d. decreasing foreign expenses; increasing foreign revenues
D
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.
D
Economic exposure refers to: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations. e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.
D
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: a. a money market hedge. b. purchasing euro put options. c. a forward purchase of euros. d. purchasing euro call options. e. selling euro call options.
D
If you purchase a straddle on euros, this implies that you: a. finance the purchase of a call option by selling a put option in the euros. b. finance the purchase of a call option by selling a call option in the euros. c. finance the purchase of a put option by selling a put option in the euros. d. finance the purchase of a put option by selling a call option in the euros. e. none of the above
D
Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30-day forward rate = $.62 a. $630,000. b. $610,000. c. $600,000. d. $590,000. e. $580,000.
D
Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar. a. reduce; high b. reduce; low c. increase; low d. increase; high
D
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
To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures
False
When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility in restructuring operations is to reduce foreign sales
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 the currency
False
A theory suggests that the percent change in exchange rates will adjust over time to reflect differential in inflation rates between the two countries
Purchasing Power Parity (PPP)
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
True
Appreciation in a firm's local currency causes reduction in cash inflows and a reduction in cash outflows
True
Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate
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
True
If the home currency begins to appreciate against all other currencies, this should reduce the current account balance, other things held equal
True
In forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be zero
True
In general, common law countries such as the US, Canada, and the UK, allow for more legal protection than French Civil law countries such as France or Italy
True
The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price
True
The markets that have a smaller amount of foreign exchange trading for speculator purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role
True
To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency
True
To weaken the dollar using sterilized intervention, the Fed will sell US dollars and simultaneously sell Treasury securities
True
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
Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is least appropriate for Boca Co. a. Joint venture b. licensing c. partial acquisition of existing Japanese firm d. establishment of Japanese subsidiary
b
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
The most risky method(s) by which firms conduct international business is: a. Franchising. b. The acquisitions of existing operations. c. import and export d. licensing
b
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
The goal of a multinational corporation (MNC) is a. The minimization of taxes remitted from foreign subsidiaries. b. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. c. The maximization of shareholder wealth. d. The maximization of social benefits resulting from actions such as the employment of foreign managers.
c
Which of the following is not a way in which agency problems can be reduced through corporate control? a. executive comp. b. threat of hostile takeover c. acquisition of a foreign subsidiary d. monitoring by large shareholders
c
A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: a. buying an identical futures contract. b. selling an identical futures contract. c. buying a futures contract with a different settlement date. d. selling a futures contract for a different amount of currency.
A
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
A quotation representing the value of a foreign currency in dollars is referred to as a(an) (blank) quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as an (blank) quotation a. direct indirect b. indirect direct c. direct direct d. indirect indirect
A
According to the "J curve effect," a weakening of the US dollar relative to its trading partners' currencies would result in an initial (Blank) in the current account balance, followed by a subsequent (blank) in the current account balance a. decrease increase b. increase decrease c. decrease decrease d. increase increase
A
An example of cross-hedging is: a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency. b. use the forward market to sell forward whatever currencies you will receive. c. use the forward market to buy forward whatever currencies you will receive. d. B and C
A
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. a. reduce; increase b. increase; reduce c. reduce; reduce d. increase; increase
A
The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation
False
The interest rate on yen is 7%.The interest rate in the US is 9%. The yen's forward rate should exhibit a discount of about 2%
False
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur? a. spot rate of peso increases; forward rate of peso decreases. b. spot rate of peso decreases; forward rate of peso increases. c. spot rate of peso decreases; forward rate of peso decreases. d. spot rate of peso increases; forward rate of peso increases.
A
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. a. strong dollar; favorably b. weak dollar; not c. strong dollar; not d. weak dollar; favorably
A
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 ____%. a. appreciate; 4.85 b. depreciate; 3,11 c. appreciate; 3.11 d. depreciate; 4.85
A
Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. a. appreciate; depreciate b. depreciate; appreciate c. depreciate; depreciate d. appreciate; appreciate
A
Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.30 90-day forward rate of pound = $1.28 3-month deposit rate in U.S. = 3% 3-month deposit rate in Great Britain = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,024,000. b. $1,030,000. c. $1,040,000. d. $1,034,000.
A
Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro. a. positive; positively b. positive; negatively c. negative; positively d. B and C e. none of the above
A
Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk? a. Diz Co. b. Yanta Co. c. the firms have about the same level of exposure. d. neither firm has any exposure.
A
Eurobonds: a. are usually issued in bearer form b. typically carry several protective covenants c. cannot contain call provisions d. A and B
A
Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: a. sell euros forward. b. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged.
A
If inflation in New Zealand suddenly increased while US inflation stayed the same, there would be: a. an inward shift in the demand schedule for the NZ$ and an outward shift in the supply schedule for NZ$ b. an outward shift in the demand schedule for the NZ$ and an inward shift in the supply schedule for NZ$ c. an outward shift in the demand schedule for the NZ$ and an outward shift in the supply schedule for NZ$ d. an inward shift in the demand schedule for the NZ$ and an inward shift in the supply schedule for NZ$
A
If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.
A
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. selling; selling b. selling; purchasing c. purchasing; purchasing d. purchasing; selling
A
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: a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.
A
Tennessee Co. conducts business in the U.S. 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 U.S. 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: a. purchase Canadian supplies. b. increase its borrowings in U.S. c. decrease prices on Canadian goods. d. decrease its borrowed funds in Canada.
A
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: a. $1.47. b. $1.53. c. $1.43. d. $1.57.
A
The international Fisher effect (IFE) suggests that: a. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate. b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate. d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
A
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
To force the value of the pound to appreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene. d. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.
A
Transaction exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.
A
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
Which of the following is an example of economic exposure but not an example of transaction exposure? a. 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. b. An increase in the pound's value increases the U.S. firm's cost of British pound payables. c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables. d. A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.
A
Which of the following operations benefits from appreciation of the firm's local currency? a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. b. receiving earnings dividends from foreign subsidiaries. c. purchasing supplies locally rather than overseas. d. exporting to foreign countries.
A
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. 15,385 b. 15625 c.22136 d. 312250
A 15,385
The conflict of goals between a firms shareholders and its managers would cause agency costs. These agency costs can come from setting up monetary or moral incentives set up to encourage the agent to act in a particular way.
Agency Problem
The action to capitalize on a discrepancy in quoted prices;in many cases, there is no investment of funds tied up for any length of time
Arbitrage
A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. decrease; appreciate
B
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
B
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
Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage? a. downward pressure on the euro's spot rate. b. downward pressure on the euro's forward rate. c. downward pressure on the U.S. interest rate. d. upward pressure on the euro's interest rate.
B
Forward contracts: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.
B
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
In which case will locational arbitrage most likely be feasible? a. One bank's ask price for a currency is greater than another bank's bid price for the currency. b. One bank's bid price for a currency is greater than another bank's ask price for the currency. c. One bank's ask price for a currency is less than another bank's ask price for the currency. d. One bank's bid price for a currency is less than another bank's bid price for the currency.
B
Licensing obligates a firm to provide (blank) while franchising obligates a firm to provide (blank) A. a specialized sales or service strategy; its technology B. its technology; a specialized sales or service straregy c. an initial investment; its technology d. its technology; an initial investment
B
Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar. a. benefit from; be unaffected by b. benefit from; be adversely affected by c. be unaffected by; be adversely affected by d. be unaffected by; benefit from e. benefit from; benefit from
B
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.
B
The demand for US exports tends to increase when: a. economic growth in foreign countries decreases b. the currencies of foreign countries strengthen against the dollar c. US inflation rises d. none of the above
B
Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries. a. weakening; increase b. weakening; decrease c. strengthening; increase d. strengthening; decrease
B
Which of the following is not true regarding the eurozone? a. Members cannot set unique monetary policy individually. b. Members cannot apply their own fiscal policies. c. Members have to agree on the ideal monetary policy. d. Its creation allowed for greater political union among its members.
B
Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? a. purchase a call option on francs. b. sell a futures contract on francs. c. obtain a forward contract to purchase francs forward. d. all of the above are appropriate strategies for the scenario described.
B
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 $1.65, your net profit per unit is: a. -$.03. b. -$.02. c. -$.01. d. $.02.
B
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 Ask-Bid/Ask
It is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time.
Balance of Payments
The cost that a trader of foreign exchange is willing to pay for a particular currency
Bid Price
A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices. a. upward; downward; upward b. upward; downward; downward c. upward; upward; downward d. downward; upward; upward
C
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 forward B. Sell forward C. Buy Call option D. Buy Put option
C
Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase
C
Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward
C
Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% Swiss deposit rate for 1 year = 8% Swiss borrowing rate for 1 year = 10% Swiss forward rate for 1 year = $.40 Swiss franc spot rate = $.39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? a. $234,000. b. $238,584. c. $240,000. d. $236,127.
C
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
C
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. a. increase; decrease; downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward
C
An economic law referring to the ability of any given economic actor to produce goods and specialization by countries can increase worldwide production.
Comparative Advantage Theory
A contract specifying an investment in a foreign money market secutiry with a simultaneous forwards sale of the currency denominating that security
Covered Interest Arbitrage
A theory refers to a condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium
Covered Interest Rate Parity
A method to cover an open position in one currency with a hedge on another currency that is highly correlated with the first currency
Cross-Hedging
A contract that grants the right to purchase a specific currency at a specific price within a specific period of time
Currency Call Option
A process of using more than one currency as an investing or financing strategy to create a currency portfolio; thus typically results in less exchange rate risk
Currency Diversification
Contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date
Currency Futures Contract
A contract granting the right to sell a particular currency at a specified price within a specified period of time
Currency Put Option
Contract agreement to exchange one currency for another at a specified exchange rate at a specified period of time or date
Currency Swap
It represents a summary of the flow of funds between one specified country and all other countries due to purchases of goods and services or to the cash flows generated by income producing financial assets.
Current Account
A weak dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S.
D
According to interest rate parity (IRP): a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
D
Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation? a. international trade b. licensing c. franchising d. direct foreign investment
D
Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity. a. discount; increase b. discount; decrease c. premium; increase d. premium; decrease
D
The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments
False
Which of the following firms is not exposed to translation exposure? a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent. b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses. c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany. d. All of the above firms are exposed to translation exposure.
D
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
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
Which of the following is not mentioned as a theory of international business? a. Theory of comparative advantage b. imperfect markets theory c. product cycle theory d. globalization of business theory
D
Which of the following is true regarding the euro? a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. b. It allows for more consistent economic conditions across countries. c. It prevents each country from conducting its own monetary policy. d. All of the above are true.
D
Which of the following is true? 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
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
D
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
D
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. Withholding taxes on foreign income
D
An overseas investment in the form of either establishing business operations or acquiring business assets in other country, such as ownership or controlling interest in a foreign company.
Direct Foreign Investment
The price that shows the value of a foreign currency in dollars
Direct Quotations
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? a. $.131. b. $.226. c. $.262. d. $.140. e. $.174.
E
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. a. $391,210. b. $396,190. c. $388,210. d. $384,761. e. none of the above
E SOLUTION: 1. Need to invest £190,476 (£200,000/1.05) = £190,476. 2. Need to exchange $384,762 to obtain the £190,476 (£190,476 x $2.02) = $384,762. 3. At the end of 180 days, need $400,152 to repay loan ($384,762 x 1.04) = $400,152.
The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations
Economic Exposure
A US based MNC has many foreign subsidiaries in Europe and does not expect to increase its investments there. Its value should increase if the value of the euro weakens over time.
False
A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time
False
A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting
False
A regression analysis of Australian dollar value on the inflation differential between the US 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%
False
A weakening of the US dollar with respect to the British pound would likely reduce US exports to the UK and increase US imports from the UK
False
An American option can only be exercised at the expiration date, while a European option can be exercised any time prior to the expiration date
False
Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk
False
If a government wishes to stimulate its economy in the form of increased foreign demand for its country's products, it could attempt to strengthen its currency
False
If the pattern of currency values over time appears random, then technical forecasting is appropriate
False
Margin requirements are deposits placed by investors in forward contracts with their respective brokerage firms when they take their position
False
A theory suggests that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate
Interest Rate Parity
A Theory states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time
International Fisher Effect
It shows a weaker dollar initially deteriorates the US trade balance; it only improves once US and non US importers respond to the change in purchasing power that is caused by the weaker dollar
J-Curve Effect
A method to predict future price using of a market-determined exchange rate to forecast the spot rate in the future
Market-Based Forecasting
A description of foreign exchange markets, implying that all relevant public information is already reflected in prevailing spot exchange rates
Semi-Strong form Efficient
A method for assessing uncertainty whereby various possibilities re input to determine possible outcomes
Sensitivity Analysis
A method to predict future price based on the historical prices, trading volume, and the trends or pattern of price movements
Technical Forecasting
A theory states that the real interest rate equals to the nominal interest rate minus the expected inflation rate
The Fisher Effect
A future contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date
True
The degree to which the value of future cash transactions can be affected by exchange rate fluctuation
Transaction Exposure
The degree to which a firm's consolidated financial statements are exposed to fluctuations in exchange rates
Translation Exposure
A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency
True
A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency
True
A description of foreign exchange markets, implying that all historical and current exchange rate information is already reflected in prevailing spot exchange rates.
Weak-Form Efficient