Intl Finance
If annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180-day forward rate will interest rate parity hold?
$.1088
An investment in the Mezzogiorno will receive a subsidized loan of $12 million from the Italian government. The loan bears an interest rate of 7% in contrast to a market rate of 10%. The loan principal must be paid back in 8 years. What is the present value of the interest subsidy?
$1.92 million
Global Industries (GI) is planning to use some existing equipment from its own facilities in a foreign project. The used equipment has a book value of $2 million but a market value of $6 million. If GI's marginal tax rate is 34%, what is its opportunity cost of using the used equipment in the foreign project?
$4.64 million
Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is
$630
Suppose five-year deposit rates on Eurodollars and Euro marks are 12% and 8%, respectively. If the current spot rate for the mark is $0.50, then the spot rate for the mark five years from now implied by these interest rates is
.5997
If the expected inflation rate is 5% and the real required return is 6%, then the Fisher effect says that the nominal interest rate should be
11.3%
Suppose that a subsidiary operates in a foreign country with a corporate tax rate of 42% and a withholding tax on dividends of 5%. If the U.S. parent has surplus foreign tax credits, what is the marginal rate of tax on remitted profits from the subsidiary?
5%
Which of the following payment methods provides the exporter with the strongest protection against risk?
Cash in advance
Which one of the following statements concerning exchange rate changes is correct?
Changes in expected, as well as actual, inflation will cause exchange rate changes.
What is the name of the market in the U.S. where trade takes place in currency futures? The
Chicago Mercantile Exchange
Which of the following payment methods provides the exporter with the weakest protection against default risk?
Consignment
___________ are a recent category of multinationals that seek out and invest in lower cost production sites overseas.
Cost minimizers
______ from the subsidiary to the parent is still the MOST important method of transferring funds in the MNC.
Dividends
The period over which the borrower may take down a Eurocurrency loan is known as the ______.
Drawdown
A _________ future is a cash-settled futures contract for a three-month $1,000,000 Eurodollar deposit that pays LIBOR.
Eurodollar
Eurodollar deposits represent the liabilities of
European banks and U.S. bank branches abroad
The world's largest currency trading market is
London
According to Shapiro, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that
Makes decisions that anticipates problems and provides solutions that enhances the firm's prospects for growth
Another name for the spread in a Eurocurrency loan is the _______.
Margin
A U.S. company whose foreign property has been expropriated is most likely to receive legal aid and indemnification from
OPIC
An index that attempts to incorporate all of the economic, social and political factors related to country risk is the
Profit Opportunity Recommendation rating
Which one of the following does NOT cause eurocurrency spreads to be narrower than in domestic money markets?
U.S. Federal Reserve bank regulations to cap interest rates charged on loans in the U.S.
The dominant currency of the Eurocurrency markets is the
U.S. dollar
What is another name for gifts and grants overseas?
Unilateral transfers
Which one of the following banks is considered the most important in the development bank industry?
World Bank
A dollar or other freely convertible currency deposited in a bank outside its country of origin is known as
a Eurocurrency
For the strategy of product shifting to succeed, it is assumed the MNC has collected
a portfolio of production facilities worldwide
According to the net \present value (NPV) rule, projects with a positive NPV should be
accepted
The type of tariff that levies import duties that are set as a percentage of the value of the imported goods is known as the
ad valorem tariff
In a currency swap, the effective interest rate on the money raised is known as the
all-in cost
Trading on the foreign exchange market is
an electronically linked network of banks, brokers, and dealers
Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully.
arbitrage
____________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy.
arbitrage
Under a fixed-rate system, which of the following four alternatives to devaluation is most likely to succeed?
austerity
What is the name of the policy aimed to lessen the need to monetize a government's budget deficit by reducing the expenditures often with the unintended outcome of increased unemployment?
austerity
The multinational financial system does NOT enable companies to
avoid exchange rate risk
A large government deficit relative to GDP, a high rate of money expansion accompanied by fixed exchange rates, along with substantial government expenditures are some of the common characteristics of _________ risk.
country
Intercompany loans are useful during periods of ______ in the financial markets.
credit rationing
Tourism shows up on the ____ account.
current
The account that records imports and exports of goods, services, income, and current unilateral transfers is known as the
current account
The most preferred form of securities for funding by firms in the U.S. has been
debt
As the real value of the dollar rises, the balance on current account is likely to
decrease
A balance of trade deficit results in a current account
deficit
The degree of political risk faced by a firm operating in a foreign country
depends on how the firm has structured its operations
High tax rates are a key indicator of country risk because they
destroy incentives to work, save, and invest
When the home currency price of a certain fixed quantity of the foreign currency is quoted, it is referred to as the
direct quotation
The party to a draft who signs and sends the draft to the second party is called the
drawer
Governments intervene in the foreign exchange markets for all of the following EXCEPT to
earn foreign exchange
A structure of incentives that rewards risk taking in productive ventures is an indicator of long-run _____________ health for a country.
economic
In its absolute version, purchasing power parity states that price levels worldwide should be _______when expressed in a common currency.
equal
One reason for the multicurrency clause in the euro markets is to avoid
exchange rate risk
The characteristic of gold that is most important to the success of a gold standard is that it is
expensive to produce as well as universally acceptable
A(n) ________ is a cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount.
forward rate agreement
What is the name for the strategy used by governments where participants will adjust their current and expected future currency needs as price levels change, interest differentials appear, and economic growth occurs?
free float
Major advantages of futures contracts include the
freedom to liquidate the contract at any time before its maturity
These are ordinary shares of a non-U.S. company listed and traded in the same form on any market in the world. They are known as
global shares
Global growth in the financial markets is driven by each of the following EXCEPT:
government capital controls
The _______ the price elasticity of demand, the _____ the incentive to hold down price and thereby expand sales.
greater, greater
Capital flight occurs for several reasons, most of which have to do with
high taxes on local investments
A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively ___ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility.
high, low
The current exchange rate system can best be characterized as a ___ system.
hybrid
Suppose the current spot rate for the pound is $01.7427. A put option with an exercise price of $01.7550 is said to be
in-the-money
In capital budgeting what matters is not the project's total cash flow per period, but the ___________ cash flows generated by the project.
incremental
When evaluating an investment, the MNC should consider the ____________ cash flows generated by the project.
incremental
The most important but at the same time the most challenging part of project analysis is to calculate the
incremental cash flows
Most currency transactions are channeled through the worldwide ________ market which accounts for _______ of foreign exchange transactions.
interbank, 95%
One of the few legal means of moving funds internationally that an MNC has is the use of the
intercompany loan
An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount.
interest rate
Suppose a U.S. corporation wants to secure fixed-rate funds in pounds in order to reduce its pound exposure, but is hampered in doing so because it is a relatively unknown credit in the British financial market. In contrast, a British company that is well established in its own country may desire floating-rate dollar financing, but is relatively unknown in the U.S. financial market. What is the most appropriate form of swap for these two parties?
interest rate/currency swap
The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34. The difference between the two rates means
interest rates are higher in the U.S. than in Germany
The issuer of corporate debt or equity will usually turn to a financing specialist to assist in designing and marketing the issue. The specialist is referred to as a
investment banker
Which of the following is the most important advantage of letter of credit financing?
it eliminates credit risk
When government intervention attempts to reduce for exporters and importers the uncertainty caused by disruptive exchange rate changes for the short and medium term, it is referred to as _________.
leaning against the wind
An exporter manufacturing a specialized piece of equipment can hedge the risk that its customer will cancel the contract before shipment by obtaining a
letter of credit
Managed floats do NOT fall into which of the following categories of central bank intervention?
letting market forces set exchange rates
Project finance is distinctive from other financings because the providers of the funding
look primarily to the cash flow from the project as the source of funds
Most international currency transactions are conducted by
major banks
The ___________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets.
market seekers
In the face of exchange rate volatility, developing a pricing strategy must address two key issues:
market share and profit margin
According to the efficient market hypothesis, which one of the following is NOT correct?
markets place a premium on the future
The primary objective of the multinational corporation is to
maximize shareholder wealth
Hedgers, mostly _____________, engage in forward contracts on the foreign exchange markets to protect the home currency value of various foreign currency-denominated assets and liabilities on their balance sheets.
multinational corporations
The _______ is defined as the present value of future cash flows discounted at the project's cost of capital minus the initial net cash outlay for the project.
net present value
If the rate of inflation in all of the world's currency markets rises from 5% to 7%, this will tend to make forward exchange rates move toward
no change on average
Which one of the following is an advantage to open account financing?
no customer resistance
The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium.
nominal interest
In the swap market, the reference amount against which the interest is calculated is known as the
notional principal
Tax arbitrage
occurs when firms move funds to lower tax jurisdictions
According to the capital asset pricing model
only the systematic component of risk affects the required return
When an exposure arises due to currency fluctuations that may alter a company's future revenues and expenses is referred to as
operating exposure
Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.3550 is said to be
out-of-the-money
Options traded in the interbank market are known as
over-the-counter options d) long-term options
The spot and 180-day forward rates for the euro are $1.3310 and $1.3402, respectively. The euro is said to be selling at a forward
premium of 1.4%
When we examine operating exposure, the key issue for a domestic firm is its
pricing flexibility
One way an MNC may improve productivity in the face of exchange rate volatility is by revising ________.
product offerings
A rise in the domestic interest rate will
raise the value of foreign-currency call options and reduce the value of foreign-currency put options
A rise in the foreign interest rate will
raise the value of foreign-currency put options and lower the value of foreign-currency call options
MNCs may use _______ arbitrage to resist government price controls or union wage pressures.
regulatory
Historically, the primary motive for U.S. multinationals to produce abroad has been to
respond more quickly to the marketplace
______ is the process of replacing bank loans with securities issued in public markets.
securitization
What is the name given to profits earned by a central bank from money creation?
seigniorage
What is the name of the debt instruments with a high coupon in earlier payment periods and a lower coupon in later payment periods?
step-down coupon notes
Swaps are primarily of value because they permit firms to
tap new capital markets reduce risks ONLY A & B
In a freely floating exchange rate system, if the capital account is running a deficit
the current account must run a surplus
The US savings deficit can be attributed, in part, to
the growing US budget deficit
Which one of the following would government taxing authorities NOT use to establish arm's length pricing?
the law of one price
The prime transmitter of global competitive forces is the
the multinational corporation
Which one of the following is NOT a measure of political instability?
the number of political parties in one nation
Why are privately placed bonds more difficult to sell than publicly issued bonds?
the presence of customized covenants
The greatest boost to a firm's competitiveness comes from compressing the time it takes to bring new and improved products to market also known as _________.
the product cycle
Which one of the following is the MOST obvious example of the globalization of financial markets?
the rise of the Euromarkets
One good indicator of political risk is
the seriousness of capital flight
Political risk is primarily a function of
uncertainty over property rights
During periods of exchange rate volatility, firms dealing in _______ products face more exchange rate risk that the firms selling _________ products.
undifferentiated, differentiated
Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change.
value
A nation that is running a savings deficit
will invest domestically more than it saves
If the U.S. trade balance with Japan is expected to go from a deficit this year to a surplus next year, the forward rate on yen would
could be either above or below the spot rate
____________ such as better quality, faster time to market, and higher customer satisfaction can have a significant impact on corporate cash flows.
Intangibles
What theory holds that a country's trade deficit worsens just after its currency depreciates because price effects will dominate the effect on volume of imports in the short run?
J-curve theory
The rate of interest paid at which high-quality borrowers can borrow at lower rates in the eurocurrency markets is known as the ____ rate.
LIBID
The average interest rate offered by a specific group of multinational banks in London is known as the
LIBOR rate
Which of the following payment methods provides both parties with a strong measure of protection against commercial and political risks?
Letter of credit
The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the
balance of payments
The overwhelming majority of foreign exchange transactions involve
banks buying and selling foreign exchange
Countertrade transactions will most probably take the form of
barter or buyback
Of all shipping documents, which of the following is the most important?
bill of lading
You can speculate on a pound depreciation by
buying pound futures and a pound put option ANSWER: none of the above selling pound futures and buying a pound call option selling pound futures and a pound put option
When the introduction of a new product takes sales away from the firm's existing products, it is known as ______.
cannibalization
Which one of the following is a real rather than a financial flow?
capital goods
When real interest rates are determined by the global supply and demand for funds, we claim that it is an example of
capital market integration
Which one of the following is an example of a market imperfection in the domestic capital market?
ceilings on interest rates
The ________ is an exchange rate system that is relatively free from central bank and other government-type interventions.
clean float
The document in international trade that contains an authoritative description of the merchandise shipped, including the full details on quality, grades, price per unit, and total value stated in a currency is known as the
commercial invoice
Which one of the following securities in the foreign bond markets has the least amount of risk to the investor?
convertible bond
Through which one of the following does the MNC have considerable freedom to transfer funds, allocated profits or both?
financial channels
One advantage of the Euro-commercial paper market over its American counterpart is
flexibility that allows borrowers a range of currencies
A U.S. company has the following choices of financial markets in which to raise capital. Which one will it most often prefer?
foreign bond
A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed exchange rate for a specified amount of one currency against another currency payment.
forward contract
Traders on the foreign exchange market use ___________ to eliminate or cover the risk of loss on export or import orders denominated in foreign currencies.
forward contracts
The basic difference(s) between forward and futures contracts is that
forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange Correct! Answer: all of the above forward contracts are individually tailored while futures contracts are standardized
