FIN 3210- Midterm Exam 1
A share of the ADR of the German firm Bergerschnus represents one share of this firm's stock that is traded on the Frankfurt Stock Exchange. The share price of Bergerschnus was 30 euros when the Frankfurt exchange closed. When the U.S. market opens, the euro is worth $1.15. If the Bergerschnus ADR is convertible into three shares of stock, the ADR price would be: a. $78.27. b. $93.45. c. $34.50. d. $103.50. e. None of these choices are correct.
. d. $103.50.
If a currency's spot market is liquid, its exchange rate will ________ highly sensitive to a single large purchase or sale of the currency. Therefore, the change in the equilibrium exchange rate will be relatively ________. a. Not be; large b. Not be; small c. Be; large d. Be; small e. None of these choices are correct
.B Not be; small
Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency put option? a. b. c. d.
B Graph
The demand curve for a currency is ________, while the supply curve for a currency is ________. a. Downward sloping; upward sloping b. Upward sloping; upward sloping c. Convex; concave d. Upward sloping; downward sloping e. Downward sloping; downward sloping
Downward sloping; upward sloping
The equilibrium exchange rate is the price of a currency at which its supply is ________ its demand. a. Slightly less than b. Substantially less than c. Slightly greater than d. Substantially greater than e. Equal to
Equal to
Which of the following is not a reason why an MNC may decide to issue stock in a foreign country? a. The market in which the stock is to be issued is highly liquid. b. The MNC wishes to establish a global image. c. Regulations in the market in which the stock is to be issued are more stringent than regulations in the home market. d. The market in which the stock is to be issued is very large, contributing to the market's liquidity. e. All of these choices are reasons why an MNC may decide to issue stock in a foreign country.
c. Regulations in the market in which the stock is to be issued are more stringent than regulations in the home market.
Which of the following is not an example of how an MNC can be affected by exchange rate movements? a. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a weaker home currency. b. When the home currency weakens, products denominated in that currency become cheaper to foreign customers, which may increase foreign demand for the MNC's products. c. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency. d. Due to exchange rate fluctuations, the number of units of a firm's home currency needed to purchase foreign supplies can change even if suppliers have not adjusted their prices. e. When the home currency strengthens, products denominated in that currency become more expensive to foreign customers, which may reduce foreign demand for the MNC's products.
c. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency.
Which of the following is the most direct example of political risk in Spain for a U.S.-based MNC with a subsidiary in Spain? a. Spain's economy may decrease. b. Spain's government may change tax rates on income earned by local citizens. c. Spain's government may impose special taxes on the subsidiary. d. Consumers in the U.S. may purchase products from companies in Spain.
c. Spain's government may impose special taxes on the subsidiary.
Which of the following events would most likely result in an appreciation of the U.S. dollar? a. Japan is expected to increase interest rates in the near future. b. Future U.S. interest rates are expected to decline. c. The Fed indicates that it will raise U.S. interest rates. d. U.S. inflation is very high. Hide Feedback
c. The Fed indicates that it will raise U.S. interest rates.
A special drawing right (SDR) is a unit of account established by a. The Asian governments. b. The Federal Reserve. c. The IMF. d. The Bank of England. e. MNCs.
c. The IMF.
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 free trade c. To enhance a country's long-term economic growth via the extension of structural adjustment loans d. To promote free mobility of capital funds across countries e. To promote stability in exchange rates
c. To enhance a country's long-term economic growth via the extension of structural adjustment loans
The demand for U.S. exports tends to decrease when a. economic growth in foreign countries increases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above
c. U.S. inflation rises
Which of the following countries has not adopted the euro? a. Spain b. France c. United Kingdom d. Germany
c. United Kingdom
As a result of the Bretton Woods Agreement, the exchange rate between any two currencies was typically a. freely floating, and not subject to central bank intervention. b. floating in accordance with the interest rate differential between countries. c. fixed within narrow boundaries d. floating, but subject to central bank intervention.
c. fixed within narrow boundaries
When you own ____, there is an obligation on your part; however, when you own ____, there is no obligation on your part. a. forward contracts; futures contracts b. call options; put options c. futures contracts; call options d. call options; forward contracts
c. futures contracts; call options
A decrease in U.S. interest rates relative to French interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros to be exchanged for dollars. a. increase; increase b. reduce; reduce c. increase; reduce d. reduce; increase
c. increase; reduce
If the United States and Japan engage in substantial financial flows but little trade, ____ directly influence their exchange rate the most. If the United States and Switzerland engage in much trade but little financial flows, ____ directly influence their exchange rate the most. a. interest rate differentials; interest rate differentials b. inflation and interest rate differentials; interest rate differentials c. interest rate differentials; inflation and income differentials d. inflation and income differentials; interest rate differentials e. income and interest rate differentials; inflation differentials
c. interest rate differentials; inflation and income differentials
A weak dollar is normally expected to cause a. low unemployment and low inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and high inflation in the U.S. d. high unemployment and high inflation in the U.S.
c. low unemployment and high inflation in the U.S.
The lower 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 being equal. a. greater; lower b. greater; greater c. lower; lower d. lower; greater
c. lower; lower
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. a. outward shift; upward b. inward shift; downward c. outward shift; downward d. inward shift; upward
c. outward shift; downward
LIBOR is a. the average inflation rate in European countries. b. the maximum deposit rate ceiling on deposits in the international money market. c. the interest rate commonly charged for loans between banks. d. the maximum loan rate ceiling on loans in the international money market.
c. the interest rate commonly charged for loans between banks.
When a currency call option is classified as "in the money," this indicates that a. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid. b. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid. c. the spot rate of the currency is greater than the exercise price of the option. d. the spot rate of the currency is less than the exercise price of the option.
c. the spot rate of the currency is greater than the exercise price of the option.
Assume that the inflation rate becomes much higher in the United States relative to Canada. This will place ____ pressure on the value of the Canadian dollar when holding other factors constant. Also, assume that Canadian interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the Canadian dollar, when holding other factors constant. a. downward; upward b. downward; downward c. upward; upward d. upward; downward
c. upward; upward
If the Fed uses a stimulative monetary policy, it may be very concerned about causing inflation if the dollar's value is expected to a. remain stable. b. strengthen. c. weaken. d. none of the above will have an impact on inflation.
c. weaken.
A year ago, Peter Allan invested in the stock of Jober, a German company. Over the last year, the stock declined in value by 20 percent. However, the euro appreciated over the year by 10 percent. If Peter sold the stock today, his return would be ________. a. -10 percent b. 32 percent c. 30 percent d. -12 percent e. None of these choices are correct.
d. -12 percent
Assume a bank's bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars. What is the bank's bid/ask percentage spread? a. 2% b. 1% c. 0% d. 1.06% e. 1.07%
d. 1.06%
Which of the following is not a way in which agency problems can be reduced through corporate control? a. Executive compensation b. Threat of hostile takeover c. Monitoring by large shareholders d. Acquisition of a foreign subsidiary e. None of these choices are correct.
d. Acquisition of a foreign subsidiary
Which of the following is mentioned in the text as a theory of international business? a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. All of the above are mentioned in the text as theories of international business.
d. All of the above are mentioned in the text as theories of international business.
Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because a. Monitoring of managers located in foreign countries is more difficult. b. MNCs are relatively large. c. Foreign subsidiary managers raised in different cultures may not follow uniform goals. d. All of these choices are correct.
d. All of these choices are correct
Among the reasons for government intervention are a. To establish implicit exchange rate boundaries. b. To respond to temporary disturbances. c. To smooth exchange rate movement. d. All of these choices are correct.
d. All of these choices are correct.
The European Monetary System a. Tied EEC member country currencies to the European Currency Unit. b. Established boundaries for the exchange rates of EEC member countries. c. Superseded the "snake" arrangement. d. All of these choices are correct.
d. All of these choices are correct.
A speculator expecting an appreciation in the Thai baht would begin his or her transaction by: a. Lending dollars. b. Borrowing baht. c. Converting dollars into baht. d. Borrowing dollars. e. None of these choices are correct.
d. Borrowing dollars.
To strengthen the dollar using sterilized intervention, the Fed would ________ dollars and simultaneously ________ Treasury securities. a. Sell; sell b. Sell; buy c. Buy; sell d. Buy; buy
d. Buy; buy
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. Increase; increase b. Increase; decrease c. Decrease; decrease d. Decrease; increase
d. Decrease; increase
Which of the following statements is not true? a. Sometimes, trade policies are used to punish countries for various actions. b. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries. c. Outsourcing affects the balance of trade because it means that a service is purchased in another country. d. Exporters may complain that they are being mistreated because the currency of their country is too weak. e. All of these choices are true.
d. Exporters may complain that they are being mistreated because the currency of their country is too weak.
________ represent(s) income received by investors on foreign investments in financial assets (securities). a. Portfolio income b. Direct foreign income c. Unilateral transfers d. Factor Income e. None of these choices are correct.
d. Factor Income
An MNC's long-term financing decisions are satisfied in the ________ market and the ________. a. International money; international credit b. International bond; international credit c. International money; international bond d. International bond; international stock e. International credit; international money
d. International bond; international stock
Which of the following is not true regarding the euro? a. It replaced the national currencies of participating countries by June 1, 2002. b. It enables participating countries to engage in cross-border trade and capital flows throughout the euro-zone. c. It prevents any individual European country from solving local economic problems with its own unique monetary policy. d. It allows for a separate money supply for each participating currency. e. All of these choices are true.
d. It allows for a separate money supply for each participating currency.
According to the text, the valuation of an MNC with foreign subsidiaries is directly affected by: a. exchange rate fluctuations b. foreign political conditions c. foreign economic conditions d. It is affected by all of the above
d. It is affected by all of the above
Included in the capital account are a. Short-term financial assets only. b. Long-term direct foreign investment. c. Short-term direct foreign investment. d. Long-term and short-term direct foreign investment and trading of securities.
d. Long-term and short-term direct foreign investment and trading of securities.
Which of the following would not result in a current account deficit? a. A strong demand for imports and a weak foreign demand for exports b. Low or no restrictions on imports c. A strong local currency d. Low national income e. High inflation
d. Low national income
Illiquid currencies tend to exhibit ________ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ________ changes in supply and demand conditions. a. Less; only large b. More; only large c. Less; even minor d. More; even minor e. None of these choices are correct.
d. More; even minor
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? a. Strengthen the dollar b. Buy dollars with foreign currency in the foreign exchange market c. Implement a tight monetary policy d. Weaken the dollar
d. Weaken the dollar
The most risky method(s) by which firms conduct international business is (are): a. Franchising. b. The acquisitions of existing operations. c. The establishment of new subsidiaries. d. [The acquisitions of existing operations.] and [The establishment of new subsidiaries.] only e. All of these choices are correct
d. [The acquisitions of existing operations.] and [The establishment of new subsidiaries.] only
Assume that Swiss corporations begin to purchase fewer supplies from the United States. This action reflects a. a decrease in the demand for Swiss francs. b. an increase in the supply of Swiss francs for sale (exchanged for dollars). c. an increased demand for Swiss francs. d. a decrease in the supply of Swiss francs for sale (exchanged for dollars).
d. a decrease in the supply of Swiss francs for sale (exchanged for dollars).
Zest Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Zest Co. has increased since last month. What could have caused this increase in value? a. a stronger Mexican economy b. higher Mexican interest rates c. depreciation of the Mexican peso d. appreciation of the Mexican peso
d. appreciation of the Mexican peso
Which of the following does not directly affect the bid/ask spread? a. inventory costs b. volume c. order costs d. bank profits
d. bank profits
The valuation of an MNC should decline when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____. a. increase; appreciate b. decrease; appreciate c. increase; depreciate d. decrease; depreciate
d. decrease; depreciate
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 ____. a. increase; increase b. decrease; decrease c. increase; decrease d. decrease; increase
d. decrease; increase
Which of the following would likely have the least direct influence on a country's current account? a. inflation b. exchange rates c. tariffs d. executive salaries
d. executive salaries
The longer 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 being equal. a. greater; lower b. lower; lower c. lower; greater d. greater; greater
d. greater; greater
Compared to international trade, direct foreign investment generally results in ____ exposure to international political risk and ____ exposure to international economic conditions. a. lower; higher b. higher; lower c. lower; lower d. higher; higher
d. higher; higher
A large increase in the income level in the U.S. along with no growth in Mexico's income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in U.S. demand for Mexico's goods, and the Mexican peso should ____. a. increase; depreciate b. decrease; depreciate c. decrease; appreciate d. increase; appreciate
d. increase; appreciate
A low home inflation rate relative to other countries would ____ the home country's current account balance, other things being equal. Low growth in the home income level relative to other countries would ____ the home country's current account balance, other things being equal. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase
d. increase; increase
The real interest rate is calculated as a. inflation rate - nominal interest rate. b. U.S.nominal interest rate - foreign nominal interest rate. c. inflation rate + nominal interest rate. d. nominal interest rate - inflation rate. e. nominal interest rate × spot rate.
d. nominal interest rate - inflation rate.
A reduction in the use of quotas is expected to a. reduce the volume of a country's trade with other countries. b. have no impact on the country's current account balance unless other governments retaliate. c. increase the country's current account balance, if other governments do not change their position. d. reduce the country's current account balance, if other governments do not change their position.
d. reduce the country's current account balance, if other governments do not change their position.
The international money market primarily concentrates on a. long-term lending. b. medium-term lending. c. placing newly issued stock in foreign markets. d. short-term deposits and loans.
d. short-term deposits and loans.
A weak dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates. a. downward; upward b. upward; downward c. downward; downward d. upward; upward
d. upward; upward
Assume a bank's bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars. How many dollars will you have left after the two conversions? a. $1,000 b. $500 c. $998.37 d. $998 e. $989.45
e. $989.45
Assume a bank's bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars. How many Danish kroner will you receive when converting the dollars initially? a. 187.50 b. 189.50 c. 5,000 d. 5,333.33 e. 5,277.04
e. 5,277.04
Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. Speeding the process by which all departments and all subsidiaries have access to the data that they need b. Establishing a centralized database of information c. Making executives more accountable for financial statements by personally verifying their accuracy d. Ensuring that all data are reported consistently among subsidiaries e. All of these choices are common methods used by MNCs to improve their internal control process.
e. All of these choices are common methods used by MNCs to improve their internal control process.
A ________ is a factor influencing the change in a currency's spot rate. a. Change in relative inflation rates b. Change in relative interest rates c. Change in government controls d. Change in relative income levels e. All of these choices are factors influencing the change in a currency's spot rate.
e. All of these choices are factors influencing the change in a currency's spot rate.
Which of the following interactions will likely have the least effect on the dollar's value? Assume everything else is held constant. a. An increase in Singapore's inflation accompanied by an increase in real U.S. interest rates b. An increase in Singapore's interest rates accompanied by an increase in U.S. inflation. c. A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates d. A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates e. An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates
e. An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates
A bond sold in countries other than the country represented by the currency denominating it is known as a: a. Eurocredit loan. b. Parallel bond. c. Foreign bond. d. Floating rate note. e. Eurobond.
e. Eurobond.
Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would a. Sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. b. Buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. c. Sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. d. Buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. e. None of these choices are correct.
e. None of these choices are correct.
The main focus of the Basel Accord is requiring banks to a. regulate themselves. b. increase deposits. c. reduce executive salaries lending. d. hold more capital if they take more risk.
NEED TO FIGURE ANSWER
An obligation to sell a specific amount of currency at a specific exchange rate at a future point in time is called a a. put option b. spot contract c. forward contract d. call option
NEED TO FIGURE OUT
The market in which the immediate exchange of currencies takes place is known as the ________ market. a. Forward b. Eurocredit c. Eurocurrency d. Futures e. Spot
NEED TO FIGURE OUT
Which of the following is not a form of corporate control that can be used to reduce agency problems in MNCs? a. Investor monitoring b. Stock options c. Hostile takeover threat d. A decentralized management style e. All of these choices are forms of corporate control that can be used to reduce agency problems in MNCs.
NEED TO FIGURE OUT ANSWER
Country Y is Country X's sole trading partner. Which of the following would increase the current account of Country X? a. The currency of Country Y depreciates against the currency of Country X. b. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on imports from Country X. c. The central banks of Country X and Country Y reduce the money supply to increase interest rates. d. The currency of Country X depreciates against the currency of Country Y.
NEED TO FIND OUT ANSWER
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 strong. b. Outsourcing means that an MNC has initiated the exporting of its products. c. Sometimes, trade policies are used to punish countries for various actions. d. All of the above are true.
NEED TO FIND OUT ANSWER
Put and call options are available on Canadian dollars (C$) with the following information: Call option premium on Canadian dollar = $.03 per unit Put option premium on Canadian dollar = $.02 per unit Call option strike price = $0.77 Put option strike price = $0.77 One option contract represents C$50,000. If you construct a short straddle position, what are the two break-even points for this position? a. $0.72 and $0.82 b. $0.74 and $0.80 c. $0.75 and $0.79 d. $0.75 and $0.80 e. $0.74 and $0.82
a. $0.72 and $0.82
Put and call options are available on euros (€) with the following information: Call option premium on euro = $.02 per unit Put option premium on euro = $.015 per unit Call option strike price = $1.12 Put option strike price = $1.10 One option contract represents €62,500. Peter Porter constructs a long strangle using euros. What are the two break-even points for this position? a. $1.065 and $1.155 b. $1.065 and $1.135 c. $1.095 and $1.155 d. $1.085 and $1.115 e. $1.005 and $1.135
a. $1.065 and $1.155
The premium on a pound put option is $.04 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.56; $1.56 b. $1.64; $1.64 c. $1.56; $1.60 d. $1.64; $1.56
a. $1.56; $1.56
A share of the ADR of the German firm Bergerschnus represents one share of this firm's stock that is traded on the Frankfurt Stock Exchange. The share price of Bergerschnus was 30 euros when the Frankfurt exchange closed. When the U.S. market opens, the euro is worth $1.15. The price of the ADR should be: a. $34.50. b. $31.15. c. $30.00. d. $26.09. e. None of these choices are correct.
a. $34.50.
If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $________. a. 1.46 b. 1.47 c. 1.55 d. 1.50 e. None of these choices are correct.
a. 1.46
Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $________ on the delivery date. a. 100,000 b. 39,062.50 c. 87,062.50 d. 48,000
a. 100,000
Trebble, Inc. is a U.S.-based MNC that will need 2 million euros in 90 days to purchase European imports. Therefore, Trebble purchases a forward contract at a forward rate of $1.05. If the spot rate of the euro in 90 days is $1.00, Trebble will pay $________ for the euros and ________ incur an opportunity cost. a. 2,100,000; does b. 2,000,000; does c. 2,000,000; does not d. 2,100,000; does not e. None of these choices are correct.
a. 2,100,000; does
Which of the following events would confirm the Imperfect Markets Theory? a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. c. A U.S. firm manufacturing computers imports the needed components from Taiwan. d. All of these choices are correct. e. None of these choices are correct.
a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.
A summary of transactions between domestic and foreign residents for a specific country over a specified period of time is the a. Balance of payments. b. Current account. c. Balance of trade. d. Capital account. e. Balance on goods and services.
a. Balance of payments.
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 inflation. Which of the following is an appropriate action given this scenario? a. Buy dollars with foreign currency b. Sell dollars for foreign currency c. Lower interest rates d. None of these choices are correct.
a. Buy dollars with foreign currency
The Norwegian kroner's (NOK) value yesterday was $0.08133. Today, its value is $0.08006. Thus, the kroner ________ by ________ percent. a. Depreciated; 1.56 b. Appreciated; 1.56 c. Appreciated; 1.59 d. Depreciated; 1.59 e. Depreciated; 1.27
a. Depreciated; 1.56
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. Direct; direct c. Cannot be answered without more information d. Indirect; indirect e. Indirect; direct
a. Direct; indirect
________ obligates a firm to provide a specialized sales or service strategy, support assistance, and possible an initial investment in exchange for periodic fees. a. Franchising b. A joint venture c. International trade d. Licensing e. None of these choices are correct.
a. Franchising
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 yen payables by purchasing yen forward c. Hedging peso receivables by selling pesos forward d. Hedging peso payables by purchasing pesos forward e. All of these choices are examples of using forward contracts.
a. Hedging pound payables by selling pounds forward
Assume that Britain and the U.S. conduct a large volume of international trade, but rarely engage in financial flows. Conversely, Japan and the U.S. conduct a large volume of financial flow transactions, but rarely engage in trade flows. Under this scenario, everything else held constant, a change in the U.S. ________ would affect the value of the pound, and a change in the U.S. ________ would affect the value of the yen. a. Inflation rate; interest rate b. Interest rate; inflation rate c. Interest rate; income level d. [Interest rate; inflation rate] and [Interest rate; income level] e. None of these choices are correct.
a. Inflation rate; interest rate
A U.S.-based MNC knows that it will receive 125,000 Singapore dollars (S$) in 30 days from a customer that has proven to be creditworthy in the past. Both futures contracts and appropriate options with maturity dates in 30 days are available. Under this scenario, what would be the best way for the MNC to hedge its position against fluctuations in the Singapore dollar's value? a. Sell S$ futures b. Buy S$ futures c. Sell a put option d. Buy a put option
a. Sell S$ futures
____ is not a bank characteristic important to customers in need of foreign exchange. a. Size of loan department b. Quote competitiveness c. Advice about current market conditions d. Forecasting advice
a. Size of loan department
In evaluating fixed versus freely floating exchange rate systems, one must realize that a. The designation of one system as more desirable may depend on a country's political environment, economic conditions, goals, and policies. b. A country's problems are more contagious to other countries in a freely floating exchange rate environment. c. A freely floating exchange rate system is always superior to a fixed exchange rate system. d. A country's problems can sometimes be alleviated by freely floating exchange rates.
a. The designation of one system as more desirable may depend on a country's political environment, economic conditions, goals, and policies.
In a fixed exchange rate system, the managerial duties of an MNC are less difficult. Which of the following will most likely not create a problem for MNCs under a fixed exchange rate system (assume the MNC has payables and receivables denominated in foreign currencies)? a. The local inflation rate increases. b. The local government revalues the local currency. c. The local government devalues the local currency. d. All of these choices will cause problems for an MNC.
a. The local inflation rate increases.
The goal of a multinational corporation (MNC) is a. The maximization of shareholder wealth. 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 social benefits resulting from actions such as the employment of foreign managers. d. The minimization of taxes remitted from foreign subsidiaries.
a. The maximization of shareholder wealth.
Which of the following is not true regarding options? a. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised. b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. c. The buyer of a call option has the right to buy the currency at the strike price. d. The buyer of a put option has the right to sell the currency at the strike price.
a. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.
Which of the following is an appropriate form of indirect intervention? a. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation. b. To weaken the dollar, the Fed reduces the money supply to increase interest rates. c. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation. d. To strengthen the dollar, the Fed increases the money supply to lower interest rates.
a. 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? a. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation. b. To strengthen the dollar, the Fed increases the money supply to lower interest rates. c. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation. d. To weaken the dollar, the Fed reduces the money supply to increase interest rates.
a. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.
Which of the following is not true regarding government intervention? a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies. b. Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets. c. Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the factors that determine it, such as interest rates. d. Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply. e. All of these choices are true.
a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies.
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. a. appreciated b. depreciated c. remained stable d. may have changed value[but the direction cannot be determined from the information provided]
a. appreciated
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. buying a futures contract with a different settlement date. c. selling an identical futures contract. d. selling a futures contract for a different amount of currency.
a. buying an identical futures contract.
Under a freely floating exchange rate system a. central bank intervention in the foreign exchange market is not necessary. b. exchange rates remain very stable because of offsetting economic conditions. c. a foreign exchange market does not exist. d. central bank intervention in the foreign exchange market is often necessary.
a. central bank intervention in the foreign exchange market is not necessary.
Assume that an American firm wants to engage in international business in which it establishes a large subsidiary in the foreign country. This strategy definitely represents ______________. a. direct foreign investment b. a joint venture c. licensing d. franchising
a. direct foreign investment
If the home currency begins to depreciate against other currencies, this should ____ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same). a. increase b. have no impact on c. reduce d. all of the above are equally possible
a. increase
The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a a. managed float system. b. crawling peg system. c. fixed system. d. pegged system.
a. managed float system.
In general, stock markets allow for more governance and attract more investors when they have all of the following except a. more flexible accounting laws when reporting corporate income. b. voting rights for shareholders c. more enforcement of the laws. d. more legal protection for shareholders.
a. more flexible accounting laws when reporting corporate income.
If a U.S. firm needs 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could a. purchase a 90-day forward contract on euros. b. purchase euros 90 days from now at the spot rate. c. sell a 90-day forward contract on euros. d. sell euros 90 days from now at the spot rate.
a. purchase a 90-day forward contract on euros.
Assume that the British government imposes quotas on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____. a. remain unchanged; decrease; increase b. remain unchanged; increase; decrease c. decrease; increase; decrease d. increase; increase; increase
a. remain unchanged; decrease; increase
Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. requiring executives to forecast future exchange rates b. ensuring that all data are reported consistently among subsidiaries c. speeding the process by which all departments and all subsidiaries have access to the data that they need d. establishing a centralized database of information
a. requiring executives to forecast future exchange rates
The agency costs of an MNC are likely to be higher if it a. scatters its subsidiaries across many foreign countries. b. decreases its volume of international business. c. uses a centralized management style. d. B and C.
a. scatters its subsidiaries across many foreign countries.
A large reduction in the current account deficit will place ____ pressure on the home currency value, other things being equal. a. upward b. downward c. no d. upward or downward (depending on the size of the deficit)
a. upward
Chapter 6 Question 20.. refer to graphs in cengage. Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency call option? a. b. c. d.
b.
Which of the following is not a possible bid/ask quotation for the Barbados dollar? a. $.50/$.51 b. $.52/$.51 c. $.51/$.52 d. $.49/$.50 e. All of these choices are possible bid/ask quotations.
b. $.52/$.51
Assume the following information regarding U.S. and Canadian annualized interest rates: Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). Malone Bank also plans to speculate on the Canadian dollar's currency movements, but it expects the Canadian spot rate 60 days from now to be $0.78. Based on this information, what amount will the borrowed amount convert to today? a. C$24 million b. $24 million c. C$ 16 million d. $16 million e. $23.4 million
b. $24 million
Put and call options are available on euros (€) with the following information: Call option premium on euro = $.02 per unit Put option premium on euro = $.015 per unit Call option strike price = $1.12 Put option strike price = $1.10 One option contract represents €62,500. The maximum loss for the long strangle position is $________ per unit. The maximum loss occurs at future spot prices ________. a. 0.02; between the two exercise prices b. 0.035; between the two exercise prices c. 0.035; above the call option strike price d. 0.035; below the put option strike price e. 0.015; between the two exercise prices
b. 0.035; between the two exercise prices
The average daily foreign exchange trading by banks around the world is closest to $________. a. 700 billion b. 1.5 trillion c. 600 billion d. 1 trillion e. 1.3 trillion
b. 1.5 trillion
Which of the following events would confirm the Product Cycle Theory? a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. c. A U.S. firm manufacturing computers imports the needed components from Taiwan. d. All of these choices are correct. e. None of these choices are correct.
b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors.
Which of the following events would confirm the Theory of Comparative Advantage? a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. b. A U.S. firm manufacturing computers imports the needed components from Taiwan. c. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. d. All of these choices are correct. e. None of these choices are correct.
b. A U.S. firm manufacturing computers imports the needed components from Taiwan.
The ________ is the difference between exports and imports. a. Current account b. Balance of trade c. Capital account d. Balance on goods and services e. Balance of payments
b. Balance of trade
Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would a. Sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. b. Buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. Sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. d. Buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. e. None of these choices are correct.
b. Buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ________ the foreign currency, invest it in the foreign country, and ________ futures in the foreign currency. a. Sell; sell b. Buy; sell c. Sell; buy d. Buy; buy
b. Buy; sell
A decline in a currency's value is known as ________. a. Deterioration b. Depreciation c. Depletion d. Appreciation e. None of these choices are correct.
b. Depreciation
Which of the following is not mentioned in the text as an additional risk resulting from international business? a. Exchange rate fluctuations b. Financial risk c. Political risk d. Exposure to foreign economies e. Country risk
b. Financial risk
The current account balance is not directly affected by a. Government restrictions. b. Interest rates. c. Exchange rate movements. d. National income. e. Inflation.
b. Interest rates.
The least risky method by which firms conduct international business is: a. The establishment of new subsidiaries b. International Trade c. Franchising d. The acquisitions of existing operations e. Licensing
b. International Trade
A currency board a. May reduce fears that the local currency will weaken even if the currency board is expected to remain in place for only a few weeks. b. Is worth considering only if the government can convince investors that the exchange rate will be maintained. c. Does little to stabilize a currency's value. d. All of these choices are correct.
b. Is worth considering only if the government can convince investors that the exchange rate will be maintained.
Licensing obligates a firm to provide ________, while franchising obligates a firm to provide ________. a. Its technology; its technology b. Its technology; a specialized sales or service strategy c. Its technology; an initial investment d. A specialized sales or service strategy; a specialized sales or service strategy e. A specialized sales or service strategy; its technology
b. Its technology; a specialized sales or service strategy
Which of the following is not a category of classification for exchange rate systems? a. Freely floating b. Managed peg c. Fixed d. Managed float
b. Managed peg
The World Bank's Multilateral Investment Guarantee Agency (MIGA) a. Provides loans to developing countries. b. Offers various forms of political risk insurance. c. Offers various forms of import insurance. d. Offers various forms of exchange rate risk insurance. e. Offers various forms of export insurance.
b. Offers various forms of political risk insurance.
Which of the following is the least likely strategy for a U.S. firm that will be purchasing 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. Sell a futures contract on francs.
When the futures price is below the forward rate, astute investors may attempt to simultaneously ________ a currency forward and ________ futures in that currency. a. Buy; buy b. Sell; buy c. Buy; sell d. Sell; sell
b. Sell; buy
________ represent aid, grants, and gifts from one country to another. a. Factor income b. Transfer payments c. The balance of trade d. The balance of payments e. The capital account
b. Transfer payments
Forward contracts contain a. a right but not a commitment to the owner, and can be tailored to the owner's desire. b. a commitment to the owner, and can be tailored to the owner's desire. c. a right but not a commitment to the owner, and are standardized. d. a commitment to the owner, and are standardized.
b. a commitment to the owner, and can be tailored to the owner's desire
If a country's government removes a tariff on imported goods, that country's current account balance will likely ____ (assuming no other changes in tariffs by other governments). a. remain unaffected b. decrease c. be fixed at zero d. increase
b. decrease
The one-year forward rate of the British pound is quoted at $1.50, and the spot rate of the British pound is quoted at $1.515. The forward ____ is ____ percent. a. discount; 1.5 b. discount; 1.0 c. premium; 1.5 d. premium; 1.0 Hide Feedback
b. discount; 1.0
If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar. a. upward b. downward c. either upward or downward (depending on the degree of the increase in Australian inflation) d. none of the above; there will be no impact
b. downward
The Sarbanes-Oxley Act caused corporate governance of MNCs to _________; it makes executives ____ accountable for verifying financial statements. a. deteriorate; more b. improve; more c. improve; less d. deteriorate; less
b. improve; more
Any event that reduces the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; nondollar currencies b. increase; the U.S. dollar c. decrease; the U.S. dollar d. decrease; nondollar currencies
b. increase; the U.S. dollar
If your firm expects the euro to substantially appreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. selling; selling b. purchasing; purchasing c. selling; purchasing d. purchasing; selling
b. purchasing; purchasing
Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a. $500,520. b. $104,262. c. $208,044. d. $521,325. e. $413,419.
c. $208,044.
Assume the following information regarding U.S. and Canadian annualized interest rates: Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). What amount will the borrowed amount convert to today? a. $25 million b. C$25 million c. C$24.39 million d. $16 million e. C$16 million
c. $479,667
Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). What is the profit or loss from Piggy Bank's speculation if the spot rate 60 days from now is indeed $0.82? a. $454,200 b. $502,166 c. $479,667 d. $20.69 million e. $20.21 million
c. $479,667
Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). What is Piggy Bank's profit or loss from speculation if the spot rate 60 days from now is indeed $0.78? a. C$601,600 b. $606,440 c. $601,600 d. $24.24 million e. C$24.24 million
c. $601,600
Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $0.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? a. $0.01 b. $0.04 c. -$0.01 d. -$0.04 e. -$0.03
c. -$0.01
Put and call options are available on Canadian dollars (C$) with the following information: Call option premium on Canadian dollar = $.03 per unit Put option premium on Canadian dollar = $.02 per unit Call option strike price = $0.77 Put option strike price = $0.77 One option contract represents C$50,000. If the spot price of the Canadian dollar at option expiration is $0.80, the profit or loss from the short straddle position is a $________ per unit. Assume that you do not own any previously purchased Canadian dollars. a. 0.05 profit b. 0.02 loss c. 0.02 profit d. 0.03 profit e. 0.05 loss
c. 0.02 profit
Assume the Canadian dollar is equal to $.90 and the Argentine peso is equal to $.30. The value of the Canadian dollars is _____ Argentine pesos. a. 2 b. 0.25 c. 3 d. 0.3
c. 3
The United States typically has a balance-of-trade deficit in its trade with ____. a. China b. Japan c. A and B d. none of the above
c. A and B
Which of the following is not mentioned in the text as a reason for the increased globalization of business? a. Increased privatization in recent years b. An increase in international trade c. An increase in GNP of virtually all countries in recent years d. Growth in direct foreign investment in recent years e. An increased standardization of products and services across countries in recent years
c. An increase in GNP of virtually all countries in recent years
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 Development Association (IDA) c. Bank for International Settlements (BIS) d. World Trade Organization e. International Financial Corporation (IFC)
c. Bank for International Settlements (BIS)
If a country experiences high inflation relative to the U.S., its exports to the U.S. should ________, its imports should ________, and there is ________ pressure on its currency's equilibrium value. a. Increase; decrease; downward b. Decrease; increase; upward c. Decrease; increase; downward d. Decrease; decrease; upward e. Increase; decrease; upward
c. Decrease; increase; downward
When the existing spot rate exceeds the exercise price, a call option is ________, and a put option is ________. a. In the money; in the money b. Out of the money; out of the money c. In the money; out of the money d. Out of the money; in the money
c. In the money; out of the money
Which of the following factors does probably not directly affect a country's capital account and its components? a. Withholding taxes on foreign income b. Exchange rate movements c. Inflation d. Interest rates e. All of these choices will directly affect a country's capital account.
c. Inflation
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. Bank for International Settlements (BIS) b. World Trade Organization (WTO) c. International Financial Corporation (IFC) d. World Bank e. International Development Association (IDA)
c. International Financial Corporation (IFC)
The market in which financial intermediaries transfer short-term funds from surplus units to deficit units is known as the ________ market. a. Forward b. Futures c. International money d. Spot e. International credit
c. International money
