IN 535 Week 11 Final Exam Part 1
The international Fisher effect (IFE) suggests that:
a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
absolute form of PPP.
relative form of PPP.
international Fisher effect (IFE).
interest rate parity (IRP)
Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.
If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
the value of the euro would often appreciate against the dollar.
the value of the euro would often depreciate against the dollar.
the value of the euro would remain constant most of the time.
the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:
Sensitivity analysis allows for all of the following except:
accountability for uncertainty.
focus on a single point estimate of future exchange rates.
development of a range of possible future values.
consideration of alternative scenarios.
If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.
Which of the following is not one of the major reasons for MNCs to forecast exchange rates?
to decide in which foreign market to invest the excess cash.
to decide where to borrow at the lowest cost.
to determine whether to require the subsidiary to remit the funds or invest them locally.
to speculate on the exchange rate movements.
Which of the following is not a method of forecasting exchange rate volatility?
Using the absolute forecast error as a percentage of the realized value to improve your forecast.
Using the volatility of historical exchange rate movements as a forecast for the future.
Using a time series of volatility patterns in previous periods.
Deriving the exchange rate’s implied standard deviation from the currency option pricing model.
The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:
the expected percentage change in the currency for the next day.
the standard deviation of the daily percentage changes in the currency over a previous period.
the current level of interest rates.
the confidence level used.
Which of the following is not a form of exposure to exchange rate fluctuations?
If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against the dollar on ____.
positive; interest expenses
positive; gross profit
negative; gross profit
negative; interest expenses
U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:
no exposure to exchange rate fluctuations.
In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
The ____ does not represent an obligation.
long-term forward contract
A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.
long-term forward contract
currency option contract
money market hedge
A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
the foreign currency; U.S.
the foreign currency; foreign country
dollars; foreign country
If a firm does not have foreign subsidiaries, it is not subject to ____.
If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.
be unaffected; weakens
be unaffected; strengthens
An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.
liability; is less than
Which of the following is an example of economic exposure but not an example of transaction exposure?
An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.
An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.
Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:
the host government of that country eliminates all quotas.
the host government of that country reduces all quotas.
the host government of that country increases all quotas.
the host government of that country eliminates all tariffs.
Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:
“red tape” barriers.
Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.
increase; postpone remitting earnings until the pound strengthens
decrease; postpone remitting earnings until the pound strengthens
decrease; remit earnings immediately before the pound strengthens
increase; remit earnings immediately before the pound strengthens
When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.
To enter markets where superior profits are possible, an MNC should:
acquire a competitor that has controlled its local market.
establish a subsidiary or acquire a competitor in a new market.
establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.
A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2 through 5.
When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.
should be; should be
should definitely not be; should definitely not be
should definitely not be; should be
should be; should definitely not be
The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.
very high; limited
very low; limited
very low; numerous
very high; numerous
Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
depreciates; is unaffected
appreciates; is unaffected
FIN 535 Week 11 Final Exam Part 2
A previously undertaken project in a foreign country may no longer be feasible because:
interest rates have declined.
the MNC’s cost of capital has decreased.
the host government has increased its tax rates substantially.
exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?
newly privatized foreign business.
If an MNC targets a successful foreign company with plans to continue the target’s local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC’s required return from acquiring the target will be relatively ____.
Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?
The firm can immediately expand its international business.
The firm benefits from existing customer relationships.
International acquisitions are generally cheaper than the establishment of a new subsidiary.
An international acquisition typically generates quicker and larger cash flows than the establishment of a new subsidiary.
When determining whether a particular proposed project in a foreign country is feasible:
a country risk rating can adequately substitute for a capital budgeting analysis.
country risk analysis should be incorporated within the capital budgeting analysis.
the effect of country risk on sales revenue is more important than the effect on cash flows.
the project with the highest country risk rating (lowest country risk) should be accepted.
____ is not a political risk factor.
High interest rates in a foreign country
To make an MNC’s operations coincide with its own goal, a host government could do all of the following, except:
require the use of local employees for managerial positions.
require social facilities.
subsidize the MNC.
require environmental controls.
An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary’s ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:
the host government’s tax rates charged on remitted earnings.
the possibility of blocked funds.
the state of the economy in Germany.
the possibility of a withholding tax imposed by the German government.
An argument for MNCs to have a debt-intensive capital structure is:
they are well diversified.
they can reduce the chance of bankruptcy.
it spreads the shareholder base.
it forces subsidiaries to pay dividends to shareholders.
One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC’s ____ is avoided.
managers and shareholders
majority shareholders and minority shareholders
managers and creditors
Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.
In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.
Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure), and if their home countries are ____ likely to experience a recession.
The ____ for a given country represents the annualized yield offered on debt for various maturities.
interest rate swap
In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
stock; one currency
stock; a portfolio of foreign currencies
one currency; stock options
one currency; another currency
A ____ gives its owner the right to enter into a swap.
Under a(n) ____ arrangement, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
An exchange of goods between two parties under two distinct contracts expressed in monetary terms is:
accounts receivable financing.
Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:
accounts receivable financing.
a letter of credit.
Which of the following is not a program of the Export-Import Bank of the U.S.?
working capital guarantee program.
project finance loan program.
direct loan program.
the foreign sales corporation program.
A ____ provides a summary of freight charges and conveys title to the merchandise.
letter of credit
bill of lading
bill of exchange
____ typically have maturities of less than one year.
MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.
Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.
A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
borrowing a portfolio of foreign currencies that are not highly correlated.
borrowing a portfolio of foreign currencies that are highly correlated.
borrowing two foreign currencies that are negatively correlated.
To ____, MNCs can use preauthorized payments.
accelerate cash inflows
minimize currency conversion costs
manage blocked funds
manage intersubsidiary cash transfers
The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.
inflation rate; exchange rate movements
income level; interest rates
interest rates; exchange rate movements
interest rates; amount invested
According to the international Fisher effect:
exchange rates adjust to compensate for income differentials between countries.
interest rates adjust to compensate for income differentials between countries.
exchange rates adjust to compensate for interest rate differentials between countries.
exchange rates adjust to compensate for risk differentials between countries.
____ may complicate cash flow optimization.
The use of a zero-balance account
Leading and lagging
The use of the balance-sheet approach