International Financial Management Exam 1

Suppose that California Co., a U.S.-based MNC that sells clothing domestically, owns a subsidiary in Mexico that handles the manufacturing of their products. California Co., has chosen to have a subsidiary in Mexico due to their relative strengths in making clothing by hand. California Co., on the other hand, focuses their efforts on the digital marketing and technological side of the business. This reasoning for expanding their business internationally is best explained by the _____.

theory of competitive advantage

T/F Agency problems arise when there is a conflict of interest between the shareholders and the managers of an multinational corporation (MNC).

true

T/F If a currency's LIBOR rate rises, the money market interest rates denominated in that currency also rise.

true

T/F There can be incentives for governments to move slowly when validating country trade requirements.

true

The United States Congress passed the Sarbanes-Oxley (SOX) Act in 2002. This act required all firms, including foreign firms, to provide more comprehensive financial information in order to list their stock on US stock exchanges. True or False: The high cost of SOX compliance leads some non-US firms to withdraw from US exchanges.

true

A large reduction in the current account deficit will place ____ pressure on the home currency value, other things being equal.

upward

Suppose that Nevada Co. has sold consulting services to Primedia, a company based in Belarus, for 700 rubles. At the time of the transaction, the prevailing exchange rate was $0.45. If Nevada Co's bank does not desire to hold such a large amount of rubles, which of the following exchange rates might they be willing to accept when Nevada Co. seeks to exchange the rubles for dollars?

$0.44

There are many factors that influence international trade, including cost of labor. _____________ in labor costs across countries drive opportunities for international trade.

Differences

The theory that costs for factors of production vary across countries, due to the immobility of these resources.

Imperfect Markets Theory

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.

Outsourcing means that an MNC has initiated the exporting of its products

The theory that a firm first produces goods domestically, then exports to foreign markets, then establishes its own foreign operations.

Product Cycle Theory

____ is not a bank characteristic important to customers in need of foreign exchange.

Size of loan department

Which of the following are reasons why an MNC might issue bonds in a particular foreign market? Check all that apply. a. The MNC intends to finance a project in a specific country and in a specific currency. b. There is stronger demand for bonds issued by the MNC in a foreign market as opposed to the domestic market. c. There is a lower interest rate in that foreign country. d. The currency in that foreign market is expected to appreciate against the MNC's home currency.

The MNC intends to finance a project in a specific country and in a specific currency. There is stronger demand for bonds issued by the MNC in a foreign market as opposed to the domestic market. There is a lower interest rate in that foreign country.

Consider the following trade agency description: Also referred to as the International Bank for Reconstruction and Development (IBRD), the primary objective of this agency's financing (and cofinancing) is to decrease poverty and facilitate economic development. A key feature of this agency is the use of structural adjustment loans (SALs), which are used to promote long-term economic growth. The previous description most closely matches which of the following agencies?

The World Bank

Country Y is Country X's sole trading partner. Which of the following would increase the current account of Country X? a. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on imports from Country X. b. The central banks of Country X and Country Y reduce the money supply to increase interest rates. c. The currency of Country X depreciates against the currency of Country Y. d. The currency of Country Y depreciates against the currency of Country X.

The currency of Country X depreciates against the currency of Country Y.

Purchasing a business that is already operating in a foreign market

acquisitions of existing operations

Which of the following does not directly affect the bid/ask spread? a. inventory costs b. volume c. order costs d. bank profits

bank profits

Individuals and groups with large equity holdings of an MNC may have influence to remove managers who do not make decisions that maximize the stock price of the MNC. This is an example of ________ control of agency problems. T/F Under a decentralized management style, more control is given to those managers who are closest to the business operations of the foreign subsidiaries.

corporate; true

Suppose that an MNC wishes to purchase a foreign exchange derivative contract in order to hedge future payments they expect to make or receive. If the MNC wishes to purchase this derivative on an exchange, rather than an over-the-counter market, it will most likely choose to purchase which of the following types of contract?

currency futures contracts

Suppose that an MNC wishes to purchase a foreign exchange derivative contract to hedge against future payments but also desires the flexibility to not use the contract if it so chooses. Which of the following contracts will the MNC most likely choose?

currency options contracts

All else equal, an expected decrease in the value of a country's currency will ___________ portfolio investment in that country.

decrease

An increase in the tax rate on corporate earnings in a country is likely to _______ direct foreign investment (DFI) in that country.

decrease

An increase in the tax rate on dividends in a country is likely to __________ portfolio investment in that country.

decrease

Consider a U.S.-based MNC parent owns subsidiaries in the France, Mexico, and Australia. Suppose that recent investment decisions by the MNC parent in its local businesses has caused the cost of capital in Australia to increase. This increase in the forecasted cost of capital will ______ the value (V) of the MNC, all else equal.

decrease

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).

decrease

Suppose a Swedish company, Ikreal Co., issues ADRs in United States. All else equal, if the spot rate of the krona should decrease, the price of the Ikreal ADR should __________.

decrease

Suppose that the firm's cost of capital increases. According to the previous formula, this increase in the cost of capital will cause the value of the firm to _____.

decrease

Suppose that individuals in the United States sell clothing items that have designer brand labels from prestigious foreign companies. However, in actuality, these items are cheaper, counterfeit substitutes produced illegally within the United States. If the United States fails to restrict these types of illegal production and sales, demand for foreign designer clothing would _________ , which would serve to ________ imports into the United States, ____________ foreign clothing producers from doing business in the United States.

decrease; reduce; discouraging

Exporting goods whose domestic production has been heavily subsidized by the government

dumping

Setting up new business operations in a foreign country

establishment of new foreign subsidiaries

Which of the following would likely have the least direct influence on a country's current account? a. executive salaries b. exchange rates c. tariffs d. inflation

executive salaries

T/F Agency problems arise when there is an alignment of interest between the shareholders and the actions of managers of an multinational corporation (MNC).

false

T/F Short-term loans of six months or less, extended by banks to MNCs in Europe, are called eurocredit loans.

false

As a result of the Bretton Woods Agreement, the exchange rate between any two currencies was typically

fixed within narrow boundaries

Suppose that in Israel the exchange rate is determined by the market, and the government makes no attempt to determine its level. This is an example of a _________ exchange rate system.

floating

Firms use a variety of methods to conduct business internationally. Consider the case of an MNC conducting international business via the use of licensing, franchising, or joint ventures. When this method of conducting international business is used, cash inflows come from ________ while cash outflows flow to _____.

foreign firms and government agencies; foreign firms and government agencies

Firms use a variety of methods to conduct business internationally. Consider the case of an MNC conducting international business via the use of international trade. When this method of conducting international business is used, cash inflows come from ______ while cash outflows flow to _____.

foreign importers; foreign exporters

Firms use a variety of methods to conduct business internationally. Consider the case of an MNC conducting international business via the use of investment in foreign subsidiaries. When this method of conducting international business is used, cash inflows come from _______ while cash outflows flow to _____.

foreign subsidiaries; foreign subsidiaries

An obligation to sell a specific amount of currency at a specific exchange rate at a future point in time is called a

forward contract

Suppose that an MNC wishes to purchase a foreign exchange derivative contract in order to hedge future payments they expect to make or receive. If the MNC wishes to purchase this derivative in an over-the-counter market, rather than an exchange, it will most likely choose to purchase which of the following types of contract?

forward contracts

An arrangement with foreign residents exchanging specialized services, assistance, and ownership of specific units in exchange for fees

franchising

Consider the case of a balance-of-trade deficit in the United States, along with a floating exchange rate. A balance-of-trade deficit implies that the value of imports is _____ than the value of exports. As the supply of dollars increases (in exchange for foreign currency to purchase imports), the value of the dollar ________ . This would lead to ________ demand for American products in foreign countries.

greater; decreases; increased

An MNC has an incentive to invest short-term funds in a foreign currency if investments denominated in the foreign currency have a ________ interest rate than investments denominated in the home currency of the MNC.

higher

The main focus of the Basel Accord is requiring banks to

hold more capital if they take more risk.

Suppose that Dakota Co., a U.S.-based technology MNC, has recently decided to conduct much of their software development in India. Dakota Co. management has cited strict domestic immigration laws and lower labor costs abroad as the reason for hiring software developers in India as opposed to the United States. This reasoning for expanding their business internationally is best explained by the _____.

imperfect markets theory

All else equal, an expected increase in the value of a country's currency will ______ portfolio investment in that country.

increase

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).

increase

An American-based subsidiary remits earnings to the parent company in Canada.

primary income; outflow

Suppose that Triloo Inc., a U.S.-based MNC that sells laptops in the United States. Triloo laptops are already well established as the most popular laptops in the United States. After conducting research and analysis, Triloo management believes there is strong demand for their laptops overseas. For this reason, Triloo will begin exporting and selling laptops abroad. This reasoning for expanding their business internationally is best explained by the _____.

product cycle theory

If a U.S. firm needs 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could

purchase a 90-day forward contract on euros.

A legal limit on the amount of a good that can be imported into a country

quota

A reduction in the use of quotas is expected to

reduce the country's current account balance, if other governments do not change their position.

France provides funds to the United States as a gift to be used for the construction of a large monument.

secondary income; inflow

The international money market primarily concentrates on

short-term deposits and loans.

A tax on goods imported into a country

tariff

LIBOR is

the interest rate commonly charged for loans between banks.

The United States typically has a balance-of-trade deficit in its trade with ____.

China and Japan

Consumers in Japan purchase baseball jerseys from their favorite US baseball teams. The jerseys are produced in the United States.

payments for goods and services; inflow

Consider the case where a US-based company purchases stock in a French company. This component of the financial account is known as _____.

portfolio investment

Piano Palace Co. produces electronic keyboards in the United States. Its most popular keyboard sells for $1,400. KeySharp Co., Piano Palace's primary competitor, is based in Germany and sells keyboards to US customers online. KeySharp sells its keyboards for 825 euros. Suppose that initially, the exchange rate was $1.60 per euro. This means that the price of KeySharp's keyboards to US consumers was 825 euros ×$1.60 per euro =$1,320.00. This means that the price of KeySharp's keyboards to US consumers was __________. Because this dollar price of keyboards from KeySharp is ______ than the dollar price of keyboards from Piano Palace, demand for Piano Palace keyboards is likely ________ relative to KeySharp's keyboards in the United States. Now suppose that the euro strengthens relative to the dollar, and the exchange rate changes to $2.00 After this change, the price of KeySharp's keyboards to US consumers is ______________. Because this dollar price of keyboards from KeySharp is now __________ than the dollar price of keyboards from Piano Palace, demand for Piano Palace keyboards is likely _________ relative to KeySharp's keyboards in the United States, due to the change in the exchange rate. Suppose that Piano Palace not only sells keyboards in the United States but also exports and sells them to France (another country in the eurozone). When the euro was $1.60, consumers in France paid _________ euros for keyboards from Piano Palace. At this exchange rate, the euro price of Piano Palace keyboards was __________ than that of KeySharp keyboards. However, at the newer exchange rate, the euro price of Piano Palace keyboards is now __________. This would cause French consumers to increase demand for ________. Generalizing from the results of this fictionalized scenario, when other currencies are strong against the dollar, US imports should be relatively ________, while US exports should be relatively ___________, leading to a _______ favorable position in terms of the balance of trade.

$1,320; lower; lower $1,650; higher; rise 875; higher; 700; Piano Palace keyboards, relative to KeySharp keyboards low; high; more

If the exchange rate (dollars for pesos) is $0.29 per peso, then the cost of a good or service you purchase while in Mexico for 850 pesos is ____.

$246.50

Suppose that Triloo Inc. expects cash flows from its French subsidiaries of 17,000,000 euros at the end of the current time period. Management at Triloo forecasts the exchange rate to be $2.00 per euro at the end of this time period. This means that Triloo will have an estimated ____________ in cash flows from French subsidiaries at the end of the current time period. Suppose that, after further analysis, management at Triloo now forecasts the euro to weaken against the dollar. Triloo expects the exchange rate at the end of the current time period to be $1.60 per euro. This means that Triloo will now have an estimated ________ in cash flows from French subsidiaries, which represents a decrease of ________ from the company's original forecast.

$34,000,000; $27,200,000; $6,800,000

Suppose that, at the end of the next time period t, a U.S.-based MNC parent named California Co. expects to receive cash flows from it's local business as well as from a subsidiary located in Mexico. At the end of time period t, the cash flow expected from the local business is expected to be $400,000 while the cash flow expected from the subsidiary in Mexico is expected to be 600,000 pesos. Assume the exchange rate for pesos is $0.12 per peso. The total expected cash flows received by this MNC at the end of period t, in dollars, is _______. Now suppose that, at the end of the next time period t, California Co. expects cash flows from subsidiaries in located both Mexico as well as the UK, in addition to cash flows from the local business in the United States. At the end of time period t, the cash flow expected from the local business is expected to be $400,000 while the cash flow expected from the subsidiary in Mexico is expected to be 600,000 pesos, which is equivalent to $72,000 at the exchange rate of $0.12 per peso. If the expected cash flow from the UK subsidiary is 1,000,000 euros, and the exchange rate is forecasted to be $0.90 per euro, then the total expected cash flows for California Co., in dollars, are _____.

$472,000; $1,372,000

Suppose that this month the exchange rate has decreased to $1.32 and that it is time for Nevada Co. to makes its monthly purchase of materials from Spicurity. In order to conduct this transaction this month, Nevada Co. now requires __________ to pay for the materials. Thus, the bank handling the transaction must reduce Nevada's account by this amount, denominated in ______ . The bank must then convert this amount to _________ and credit it to Spicurity's account. T/F The bank has not acted as a foreign exchange dealer in this transaction.

$514,800; dollars; 390,000 euros false

Suppose that Nevada Co., a US-based MNC, makes regular, monthly purchases of materials from a German supplier named Spicurity. These regular payments are typically in the amount of 390,000 euros. Last month the exchange rate was $1.34 per euro. Nevada Co. only has cash reserves in dollars, while Spicurity only has cash reserves in euros. Suppose both companies use the same bank. In order to conduct this transaction last month, Nevada Co. required _____________ to pay for the materials. Thus, the bank handling the transaction reduced Nevada's account by this amount, denominated in _______. The bank then converted this amount to ____________ and credited it to Spicurity's account.

$522,600; dollars; 390,000 euros

Firms outside of the US can access equity financing in the US via the use of American depository receipts (ADRs). ADRs represent bundles of the foreign firm's stock, and the use of these certificates can help to avoid some of the costs of meeting the disclosure requirements imposed by SOX and other acts. Suppose a Swedish company, Ikreal Co., issues ADRs in United States. The price of a share of Ikreal stock is 294 krona, while the spot rate for krona is $0.25 per krona. The price of the Ikreal ADR is _________.

$73.50

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.

3

Which of the following best describes why the fall of the Berlin Wall served to increase international trade? a. The fall of the wall led to increased regulations and tariffs on imported goods. b. The fall of the wall led immediately to a common currency across Europe in the early 1990s. c. The fall of the wall improved relations across Europe, while also leading to reduction in trade barriers within Eastern Europe and increased interest from MNCs. d. The fall of the wall led to more government control of private businesses.

The fall of the wall improved relations across Europe, while also leading to reduction in trade barriers within Eastern Europe and increased interest from MNCs.

The theory that countries are better off by specializing in the production of a particular good, while trading for other necessary goods.

Theory of Competitive Advantage

The demand for U.S. exports tends to decrease when

U.S. inflation rises

Suppose that an MNC attempts to alleviate agency problems by more closely monitoring managers of their foreign subsidiaries. This is an example of ________ control of agency problems. T/F Under a centralized management style, the MNC parent managers usually make more informed local business decisions than the managers of their foreign subsidiaries.

parent; false

Consider a U.S.-based MNC parent, Triloo Inc., that owns subsidiaries in the France, Mexico, and Australia. Suppose that the economy in Australia strengthens, leading to a higher national income. This higher national income in Australia will most likely _____ the demand for Triloo products, leading to ______ expected cash flows denoted in australian dollars and an ________ in the value of Triloo Inc. This example is best classified as a case of exposure to _______.

increase; higher; increase; international economic conditions

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.

increase; increase

Outsourcing business functions to other countries ______ international trade.

increases

Exporting goods to sell in foreign markets, while importing inputs at lower cost

international trade

An arrangement whereby two or more firms own and operate a business

joint ventures

If a country's currency is expected to weaken relative to the currency of a potential foreign investor, direct foreign investment (DFI) becomes ________ likely.

less

weaker legal protection for shareholders

less trading activity

weaker rights of shareholders

less trading activity

An arrangement exchanging the right to use technology for fees

licensing

If a country's currency is expected to strengthen relative to the currency of a potential foreign investor, direct foreign investment (DFI) becomes ______ likely.

more

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. more enforcement of the laws. c. voting rights for shareholders d. more legal protection for shareholders.

more flexible accounting laws when reporting corporate income.

less corporate corruption

more trading activity

more uniform accounting laws

more trading activity

If there is ___________ for a bond, a bondholder may not be able to sell a bond at the desired time or may have to decrease the price of their bonds in order to sell them. The risk of this occurrence is known as ___________ risk.

no active market; liquidity