-Madura
Multiple IFM Choice
Identify the letter of the choice that best completes the statement or answers the question.
____
____
____
____
____
____
____
____
1. Which of the following theories identifies specialization as a reason for international business?
a. theory of comparative advantage.
b. imperfect markets theory.
c. product cycle theory.
d. none of the above.
2. A product cycle is the process by which a firm provides a specialized sales or service strategy, support
assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
a. true.
b. false.
3. Which of the following is not a provision or result of the Single European Act of 1987?
a. increased regulatory uniformity among European countries.
b. the phasing in of a common currency for all European countries by 1992.
c. the removal of many taxes on goods traded between European countries.
d. firms' ability to achieve economies of scale.
e. all of the above.
4. Which of the following is not mentioned in the text as an additional risk resulting from international business?
a. exchange rate fluctuations.
b. political risk.
c. interest rate risk.
d. exposure to foreign economies.
5. Due to the larger opportunity set of funding sources around the world from which an MNC can choose, an
MNC may be able to obtain capital at a lower cost than a purely domestic firm.
a. true.
b. false.
6. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as
exchange rates are stable over time.
a. true.
b. false.
7. If the home currency begins to appreciate against other currencies, this should ____________ the current
account balance, other things equal (assume that substitutes are readily available in the 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
8. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:
a. higher in the U.S. than in European countries.
b. lower in the U.S. than in European countries.
c. higher in the U.S. than in about half the European countries, and lower in the U.S. than the
others.
d. about the same in the U.S. as in European countries.
____
____
____
____
____
____
____
____
____
____
9. 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. World Bank
b. International Financial Corporation (IFC)
c. World Trade Organization (WTO)
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)
10. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to
Britain and increase U.S. imports from Britain.
a. true.
b. false.
11. The World Bank extends loans only to developed nations, while the International Development Association
(IDA) extends loans only to developing nations.
a. true.
b. false.
12. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds)
between countries that do not affect the transfer of control.
a. true.
b. false.
13. Intracompany trade represents the exporting of products by one country to other countries below cost.
a. true.
b. false.
14. A tariff is a maximum limit on imports.
a. true.
b. false.
15. Eurocurrency market transactions normally represent:
a. the equivalent of $1 million or more.
b. the equivalent of $1,000 to $10,000.
c. the equivalent of between $10,000 and $100,000.
d. the equivalent of between $100,000 and $200,000.
16. From 1944 to 1971, the exchange rate between any two currencies was typically:
a. fixed within narrow boundaries.
b. floating, but subject to central bank intervention.
c. floating, and not subject to central bank intervention.
d. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign
transactions.
17. Which of the following is not true regarding the Bretton Woods Agreement?
a. It called for fixed exchange rates between currencies.
b. Governments intervened to prevent exchange rates from moving more than 1 percent
above or below their initially established levels.
c. The agreement lasted from 1944 until 1971.
d. Each country used gold to back its currency.
e. All of the above are true regarding the Bretton Woods Agreement.
18. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in
Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?
a. 73.75.
b. 125.
c. 1.69.
____ 19.
____ 20.
____ 21.
____ 22.
____ 23.
____ 24.
____ 25.
____ 26.
d. 0.014.
e. none of the above.
The Single European Act and the Basel Accord prevented a trend toward increased globalization in the
banking industry.
a. true.
b. false.
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
Currency futures contracts sold on an exchange:
a. contain a commitment to the owner, and are standardized.
b. contain a commitment to the owner, and can be tailored to the desire of the owner.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of the
owner.
d. contain a right but not a commitment to the owner, and are standardized.
Which of the following is true?
a. The futures market is primarily used by speculators while the forward market is primarily
used for hedging.
b. The futures market is primarily used for hedging while the forward market is primarily
used for speculating.
c. The futures market and the forward market are primarily used for speculating.
d. The futures market and the forward market are primarily used for hedging.
European currency options can be exercised _______; American currency options can be exercised _______.
a. any time up to the expiration date; any time up to the expiration date
b. any time up to the expiration date; only on the expiration date
c. only on the expiration date; only on the expiration date
d. only on the expiration date; any time up to the expiration date
A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This
put option can be referred to as:
a. in the money.
b. out of the money.
c. at the money.
d. at a discount.
Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency
positions?
a. forward contracts.
b. futures contracts.
c. non-deliverable forward contracts.
d. options.
e. all of the above are instruments used to cover foreign currency positions.
The lower bound of the call option premium is the greater of zero and the difference between the spot rate and
the exercise price; the upper bound of a currency call option is the spot rate.
a. true.
b. false.
____ 27. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can
be conducted.
a. true.
b. false.
____ 28. The highest amount a buyer of a call or a put option can lose is the exercise price.
a. true.
b. false.
____ 29. A primary result of the Bretton Woods Agreement was:
a. the establishment of the European Monetary System (EMS).
b. establishing specific rules for when tariffs and quotas could be imposed by governments.
c. establishing that exchange rates of most major currencies were to be allowed to fluctuate
1% above or below their initially set values.
d. establishing that exchange rates of most major currencies were to be allowed to fluctuate
freely without boundaries (although the central banks did have the right to intervene when
necessary).
____ 30. A weaker dollar places _______ pressure on U.S. inflation, which in turn places _______ pressure on U.S.
interest rates, which places _______ pressure on U.S. bond prices.
a. upward; downward; upward
b. upward; downward; downward
c. upward; upward; downward
d. downward; upward; upward
e. downward; downward; upward
____ 31. The euro is the currency:
a. adopted in all western European countries as of 1999.
b. adopted in all eastern European countries as of 1999.
c. adopted in all European countries as of 1999.
d. none of the above.
____ 32. 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. sell dollars for foreign currency.
b. buy dollars with foreign currency.
c. lower interest rates.
d. none of the above.
____ 33. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?
a. Thailand.
b. Indonesia.
c. Russia.
d. China.
e. Malaysia.
____ 34. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries
than it would under a freely floating exchange rate system.
a. true.
b. false.
____ 35. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in
the foreign exchange market to maintain exchange rates within specified boundaries.
a. true.
b. false.
____ 36. If interest rate parity exists, then _______ is not feasible.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
____ 37. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information,
as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect
to the U.S. dollar should _______, and the exchange rate of the Mexican peso (MXP) with respect to the U.S.
dollar should _______.
a. appreciate; depreciate
b. depreciate; appreciate
c. depreciate; depreciate
d. appreciate; appreciate
e. remain stable; appreciate
____ 38. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for
Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes
for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?
a. A$39.93.
b. A$25,043.48.
c. A$553.00.
d. none of the above.
____ 39. Assume the following information:
You have $900,000 to invest
Current spot rate of Australian dollar (A$)
180-day forward rate of the Australian
dollar
180-day interest rate in the U.S.
180-day interest rate in Australia
=
=
$.62
$.64
=
=
3.5%
3.0%
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
a. $56,903.
b. $61,548.
c. $27,000.
d. $31,500.
____ 40. Because there are sometimes no substitutes for traded goods, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C.
____ 41. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in
equilibrium and:
a. the income differential.
b. the forward discount or premium.
c. the inflation differential.
d. none of the above.
____ 42. According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries,
its inflation rate will likely be _______ than other countries, and its currency will _______.
a. lower; strengthen
b. lower; weaken
c. higher; weaken
d. higher; strengthen
____ 43. Which of the following is true according to the text?
a. Forecasts in recent years have been very accurate.
b. Use of the absolute forecast error as a percent of the realized value is a good measure to
use in detecting a forecast bias.
c. Forecasting performance has improved substantially in recent years.
d. None of the above.
____ 44. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange
rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the
inflation differential variable is .4. Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly (positively) related to the interest rate variable.
b. The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly related to the exchange rate.
c. The interest rate variable is directly related to the exchange rate, and the inflation variable
is directly related to the exchange rate.
d. The interest rate variable is directly related to the exchange rate, and the inflation variable
is directly related to the interest rate variable.
____ 45. If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all
relevant private information, then _______ would be refuted.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C
____ 46. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the
Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate.
Consequently, management believes its forecasts to be biased. The following regression model was estimated
to determine if the forecasts over the last ten years were biased:
St - a0 + a1Ft-1 + t,
where St is the spot rate of the pound in year t and Ft-1 is the forward rate of the pound in year t-1. Regression
results reveal coefficients of a0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have
______________ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above
____ 47. Which of the following is not a method of forecasting exchange rate volatility?
a. using the absolute forecast error as a percentage of the realized value to improve your
forecast.
b. using the volatility of historical exchange rate movements as a forecast for the future.
c. using a time series of volatility patterns in previous periods.
d. deriving the exchange rate's implied standard deviation from the currency option pricing
model.
____ 48. When measuring forecast performance of different currencies, it is often useful to adjust for their relative
sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.
a. true.
b. false.
____ 49. Foreign exchange markets appear to be strong-form efficient.
a. true.
b. false.
____ 50. Market-based forecasting involves the use of historical exchange rate data to predict future values.
a. true.
b. false.
____ 51. A forecasting technique based on fundamental relationships between economic variables and exchange rates,
such as inflation, is referred to as technical forecasting.
a. true.
b. false.
____ 52. Economic exposure can affect:
a. MNCs only.
b. purely domestic firms only.
c. A and B.
d. none of the above.
____ 53. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's
local currency should:
a. increase local sales as it reduces foreign competition in local markets.
b. increase the firm's exports denominated in the local currency.
c. increase the returns earned on the firm's foreign bank deposits.
d. increase the firm's cash outflow required to pay for imported supplies denominated in a
foreign currency.
e. none of the above.
____ 54. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B
has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is
$.55. What is the net inflow or outflow as measured in U.S. dollars?
a. $500,000 outflow.
b. $500,000 inflow.
c. $275,000 inflow.
d. $275,000 outflow.
____ 55. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the
MNC's funds are lev and 70% leu. are The standard deviation of exchange movements is 10% for lev and
15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based
on this information, the standard deviation of this two-currency portfolio is approximately:
a. 17.28%.
b. 13.15%.
c. 14.50%.
d. 12.04%.
____ 56. Two highly negatively correlated currencies act almost as if they are the same currency.
a. true.
b. false.
____ 57. Translation exposure is less of a concern when earnings are not remitted by the subsidiary to the parent.
a. true.
b. false.
____ 58. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign
currency.
a. true.
b. false.
____ 59. A reduction in hedging will probably reduce transaction exposure.
a. true.
b. false.
____ 60. If a Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen
but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment
arrives, the most appropriate hedge would be:
a. a money market hedge.
b. a forward sale of yen.
c. purchasing yen call options.
d. purchasing yen put options.
e. selling yen put options.
____ 61. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate
substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.
____ 62. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of
350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit
and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180
days is:
Future Spot Rate
$.46
$.48
$.52
Probability
20%
30%
50%
The 90-day forward rate of the Australian dollar is $.50.
____ 63.
____ 64.
____ 65.
____ 66.
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a. 0%.
b. 80%.
c. 50%.
d. none of the above.
Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the
MNC is already insulated by the offsetting positions between subsidiaries.
a. true.
b. false.
A money market hedge involves taking a money market position to cover a future payables or receivables
position.
a. true.
b. false.
MNCs generally do not perceive their foreign exchange management as a profit center.
a. true.
b. false.
With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used
to hedge translation exposure _______.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed
____ 67. Assume the correlation coefficient between the returns on existing projects and the return on a proposed
foreign project is 1. Also assume the returns on existing projects and the new project are equal, and that the
existing projects have a lower standard deviation than the proposed project. Under this scenario, undertaking
the proposed project will ___________ the variance of the firm's overall returns.
a. decrease
b. increase
c. decrease or increase, depending on the exact size of the returns and standard deviations
d. none of the above
____ 68. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing
plants) in foreign countries.
a. true.
b. false.
____ 69. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the
parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
d. B and C are both ideal.
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial
investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project
after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All
cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are
the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian
kroner (NOK):
Year 1
NOK10,000,000
Year 2
NOK15,000,000
Year 3
NOK17,000,000
Year 4
NOK20,000,000
The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian
kroner over the project's lifetime is listed below:
Year 1
$.13
Year 2
$.14
Year 3
$.12
Year 4
$.15
____ 70. Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a. -$803,848.
b. $5,803,848.
c. $1,048,829.
d. none of the above.
____ 71. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the
subsidiary obtain partial financing for the project.
a. true.
b. false.
Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political
considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target
and has provided you with the following information:
Klimewsky expects to keep the target for three years, at which time it expects to sell the
firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes
paid.
Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues
for the next year are MYR300 million. Revenues are expected to increase by 9% over the
following two years.
Cost of goods sold are expected to be 60% of revenues.
Selling and administrative expenses are expected to be MYR40 million in each of the next
three years.
The Malaysian tax rate on the target's earnings is expected to be 30%.
Depreciation expenses are expected to be MYR15 million per year for each of the next three
years.
The target will need MYR9 million in cash each year to support existing operations.
The target's current stock price is MYR35 per share. The target has 11 million shares
outstanding.
Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc.
Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected
exchange rate for the next three years. This exchange rate is currently $.23.
Klimewsky's required rate of return on similar projects is 13%.
____ 72. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target
is $_______ million.
a. 155.9
b. 111.5
c. 138.0
d. 143.0
e. none of the above
____ 73. Most countries discourage hostile takeovers.
a. true.
b. false.
____ 74. Premiums required to entice a target's board of directors to approve an acquisition commonly range from 60
percent to 80 percent of the target's market price.
a. true.
b. false.
____ 75. If potential acquirers are based in different countries, their required rates of return when considering a specific
target will only vary if the desired use of the target is different.
a. true.
____ 76.
____ 77.
____ 78.
____ 79.
____ 80.
____ 81.
____ 82.
____ 83.
____ 84.
b. false.
Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at
various times. In fact, this analysis may indicate that a previously accepted project should be divested.
a. true.
b. false.
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:
a. the host government's tax rates charged on remitted earnings.
b. the possibility of blocked funds.
c. the state of the economy in Germany.
d. the possibility of a withholding tax imposed by the German government.
According to the text, MNCs:
a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of the above.
According to the text, an MNC's "global" target capital structure is:
a. always debt-intensive.
b. always equity-intensive.
c. sometimes different from an MNC's "local" capital structures (at subsidiaries).
d. none of the above.
According to the text:
a. the cost of debt for each country is somewhat stable over time.
b. the cost of debt for countries change over time, and these changes are negatively
correlated.
c. the cost of debt for countries change over time, and these changes are positively
correlated.
d. the cost of debt for countries change over time, and are not correlated.
MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on an average stock is
13%. What is the required rate of return on MNC stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above.
In general, MNCs probably prefer to use ____________ foreign debt when their foreign subsidiaries are
subject to ___________ local interest rates.
a. more; low
b. more; high
c. less; low
d. B and C
e. none of the above
If the currency denominating a foreign bond depreciates against the firm's home currency, the funds needed to
make coupon payments will increase.
a. true.
b. false.
An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
a. convert to floating-rate debt.
b. hedge exchange rate risk.
c. lock in the interest payments on debt.
d. remove the default risk of its debt.
____ 85. Minnie Corp. has decided to issue three-year bonds denominated in 5,000,000 Slovakian koruna (SKK) at par.
The bonds have a coupon rate of 17%. If the koruna is expected to appreciate from its current level of $.03 to
$.032, $.034, and $.035 in years 1, 2,and 3, respectively, what is the financing cost of these bonds?
a. 17%.
b. 23.18%.
c. 22.36%.
d. 23.39%.
____ 86. In a(an) ___________ swap, two parties agree to exchange payments associated with bonds; in a(an)
____________ swap, two parties agree to periodically exchange foreign currencies.
a. interest rate; currency
b. currency; interest rate
c. interest rate; interest rate
d. currency; currency
____ 87. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume
the following information for Good and Bad Companies:
Good Company
Bad Company
____ 88.
____ 89.
____ 90.
____ 91.
Fixed Rate Bond
10%
12%
Variable Rate Bond
LIBOR + 1%
LIBOR + 1.5%
Given this information:
a. an interest rate swap will probably not be advantageous to Good Company because it can
issue both fixed and variable debt at more attractive rates than Bad Company.
b. an interest rate swap attractive to both parties could result if Good Company agreed to
provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed
rate payments of 10.5%.
c. an interest rate swap attractive to both parties could result if Bad Company agreed to
provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed
rate payments of 10.5%.
d. none of the above.
If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond
denominated in euros, it would sell euros forward.
a. true.
b. false.
The __________ offers insurance against political and credit risks related to credit from international trade.
a. Domestic International Sales Corporation (DISC)
b. Private Export Funding Corporation (PEFCO)
c. Export-Import Bank
d. Foreign Credit Insurance Association (FCIA)
__________ was established in 1934 with the intention to facilitate Soviet-American trade.
a. Domestic International Sales Corporation (DISC)
b. Private Export Funding Corporation (PEFCO)
c. Export-Import Bank
d. Foreign Credit Insurance Association (FCIA)
The objectives of the Export-Import Bank of the United States include the assumption of underlying credit
risk and country risk to encourage private lenders to finance export trade and the provision of direct loans to
foreign buyers when private lenders are unwilling to do so.
a. true.
b. false.
____ 92. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year
forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end
of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a
U.S. firm that takes out a one-year, uncovered British loan?
a. about 12.4%.
b. about 7.1%.
c. about 13.5%.
d. about 10.3%.
e. about 11.3%.
Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen () and Sudanese dinar (SDD) for a
six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio
consisting of 30% yen and 70% dinar. Cameron has gathered the following information:
Mean effective financing rate of Japanese yen for six months
Mean effective financing rate of Sudanese dinar for six months
Standard deviation of Japanese yen's effective financing rate
Standard deviation of Sudanese dinar's effective financing rate
Correlation coefficient of effective financing rates of these two currencies
4%
1%
.10
.20
.23
____ 93. Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron?
a. 2.24%.
b. 14.98%.
c. 2.89%.
d. 17.00%.
e. none of the above.
____ 94. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the
foreign currency.
a. true.
b. false.
____ 95. Netting can achieve all but one of the following:
a. Cross border transactions between subsidiaries are reduced.
b. Transactions costs are reduced.
c. Currency conversion costs are reduced.
d. Transaction exposure is eliminated.
____ 96. According to the text:
a. banks in most non-U.S. countries are as capable as the U.S. in facilitating cash transfers
and most other cash management operations for MNCs.
b. banks in most non-U.S. countries are more advanced than the U.S. in facilitating cash
transfers for MNCs.
c. an MNC with subsidiaries in several different countries has no problems in coordinating
its cash transfers since a uniform global banking system exists.
d. none of the above.
____ 97. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are
consolidated over a specific period of time.
a. true.
b. false.
____ 98. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the
dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S.
Treasury securities during this period, their effective yield would have been:
a. negative.
b. zero.
c. positive, but less than the interest rate of their respective countries.
d. more than the interest rate of their respective countries.
____ 99. Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to
some limit.
a. true.
b. false.
____ 100. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates
may be preferable to a single point estimate.
a. true.
b. false.
IFM -Madura
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
A
B
B
C
A
B
C
B
B
B
B
A
B
B
A
A
D
D
B
B
A
A
D
B
E
A
A
B
C
C
D
B
D
A
B
C
A
A
A
A
C
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
C
D
B
D
B
A
A
B
B
B
C
E
D
B
B
A
B
B
D
A
C
B
A
A
A
B
A
A
C
A
B
A
B
B
A
C
D
C
C
A
A
B
A
D
A
B
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
B
D
C
A
E
B
B
D
D
A
D
A
A