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Question 1

The Fisher effect is used to determine the:

Answer

real inflation rate.

real interest rate.

real spot rate.

real forward rate.

5 points

Question 2

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?

Answer

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.

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If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.

5 points

Question 3

Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.

Answer

3.43%

5.68%

6.5%

7.3%

5 points

Question 4

Which of the following is indicated by research regarding purchasing power parity (PPP)?

Answer

PPP clearly holds in the short run.

Deviations from PPP are reduced in the long run.

PPP clearly holds in the long run.

There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

5 points

Question 5

Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.

Answer

appreciate; 3%

appreciate; 1%

depreciate; 3%

depreciate; 2%

appreciate; 2%

5 points

Question 6

Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:

Answer

depreciation in the Australian dollar's value over the next year.

appreciation in the Australian dollar's value over the next year.

no change in the Australian dollar's value over the next year.

information on future interest rates is needed to answer this question.

5 points

Question 7

If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.

Answer

spot; high

spot; low

forward; high

forward; low

5 points

Question 8

Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.

Answer

appreciate; 16.22

depreciate; 16.22

appreciate; 6.66

depreciate; 6.66

5 points

Question 9

Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?

Answer

$.840

$.890

$.856

$.854

5 points

Question 10

Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate?

Answer

fundamental forecasting.

market-based forecasting.

technical forecasting.

mixed forecasting.

5 points

Question 11

Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:

Answer

benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.

benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.

be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.

be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

5 points

Question 12

____ is (are) not a determinant of translation exposure.

Answer

The MNC's degree of foreign involvement

The locations of foreign subsidiaries

The local (domestic) earnings of the MNC

The accounting methods used

5 points

Question 13

One argument for exchange rate irrelevance is that:

Answer

MNCs can hedge exchange rate exposure much more effectively than individual investors.

investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.

purchasing power parity does not hold very well.

MNCs are typically not diversified across numerous countries.

5 points

Question 14

Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.

Answer

increase; decrease

decrease; increase

increase; stay the same

stay the same; stay the same

5 points

Question 15

Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.

Answer

favorably; stronger

favorably; weaker

not; stronger

not; weaker

5 points

Question 16

Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?

Answer

$1,000,000.

$1,055,602.

$1,000,830.

$1,045,644.

5 points

Question 17

Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

Answer

sell euros forward.

purchase euro currency put options.

purchase euro currency call options.

purchase euros forward.

remain unhedged.

5 points

Question 18

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

Answer

sell euros forward

purchase euro currency put options.

purchase euro currency call options.

purchase euros forward.

remain unhedged.

5 points

Question 19

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.

Answer

the foreign currency; U.S.

the foreign currency; foreign country

dollars; foreign country

dollars; U.S.

5 points

Question 20

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

Answer

positive.

negative.

positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.

zero.

5 points

Question 21

Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.

Answer

favorably; favorably

favorably; adversely

adversely; favorably

adversely; adversely

5 points

Question 22

Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.

Answer

increase; increase

decrease; increase

decrease; decrease

increase; decrease

increase; be unaffected

5 points

Question 23

Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.

Answer

tax deductible; not taxed

not tax deductible; not taxed

not tax deductible; taxed

tax deductible; taxed

5 points

Question 24

Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.

Answer

loss; smaller

loss; larger

gain; larger

gain; smaller

5 points

Question 25

If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.

Answer

benefit; weakens

be unaffected; weakens

be unaffected; strengthens

benefit; strengthens

5 points

Question 26

Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.

Answer

increase; postpone remitting earnings until the euro weakens

decrease; postpone remitting earnings until the euro weakens

decrease; remit earnings immediately before the euro weakens

increase; remit earnings immediately before the euro weakens

5 points

Question 27

From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:

Answer

is the top point.

is the point closest to the vertical axis.

is the point half way between the two end points.

cannot be determined since firms vary in their willingness to accept risk.

5 points

Question 28

To fully benefit from economies of scale, an MNC should:

Answer

establish a subsidiary in a new market that can sell products produced elsewhere.

establish a subsidiary in a market that has relatively low costs of labor or land.

establish a subsidiary in a market where raw materials are cheap and accessible.

participate in a joint venture in order to learn about a production process or other operations.

5 points

Question 29

Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?

Answer

Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.

Host governments generally perceive DFI as a remedy to eliminate a country's political problems.

The ability of a host government to attract DFI is dependent on the country's markets and resources.

Some types of DFI will be more attractive to some governments than to others.

5 points

Question 30

Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?

Answer

Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.

Host governments generally perceive DFI as a remedy for their national problems.

The ability of a host government to attract DFI is dependent on the country's markets and resources.

Some types of DFI will be more attractive to some governments than to others.

5 points

Question 31

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

Answer

a risk-adjusted discount rate.

a payback period.

certainty equivalents.

simulation.

5 points

Question 32

An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.

Answer

positively; positively

positively; negatively

negatively; positively

negatively; negatively

5 points

Question 33

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

Answer

appreciate; low

appreciate; high

depreciate; high

depreciate; low

5 points

Question 34

The required rate of return of a project is ____ the MNC's cost of capital.

Answer

greater than

less than

the same as

any of the above, depending on the specific project

5 points

Question 35

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.

Answer

depreciates; depreciates

appreciates; appreciates

depreciates; appreciates

appreciates; depreciates