FINA 7320 - Through Unit 2
36 Pages

FINA 7320 - Through Unit 2

Course Number: FIN 201, Spring 2012

College/University: Dallas

Word Count: 8333

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Chapter 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1 The commonly accepted goal of the MNC is to: A) maximize short-term earnings. B) maximize shareholder wealth. C) minimize risk. D) A and C. E) maximize international sales. 2 For the MNC, agency costs are typically: A) non-existent. B) larger than agency costs of a small purely domestic firm. C) smaller than...

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1 Multiple Chapter Choice Identify the choice that best completes the statement or answers the question. 1 The commonly accepted goal of the MNC is to: A) maximize short-term earnings. B) maximize shareholder wealth. C) minimize risk. D) A and C. E) maximize international sales. 2 For the MNC, agency costs are typically: A) non-existent. B) larger than agency costs of a small purely domestic firm. C) smaller than agency costs of a small purely domestic firm. D) the same as agency costs of a small purely domestic firm. 3 Which of the following could reduce agency problems for an MNC? A) stock options as managerial compensation. B) hostile takeover threat. C) investor monitoring. D) all of the above are forms of corporate control that could reduce agency problems for an MNC. 4 The valuation of an MNC should rise when an event causes the expected cash flows from foreign to ____ and when foreign currencies denominating these cash flows are expected to ____. A) decrease; appreciate B) increase; appreciate C) decrease; depreciate D) increase; depreciate 5 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 6 Which of the following theories identifies the non-transferability of resources as a reason for international business? A) theory of comparative advantage. B) imperfect markets theory. C) product cycle theory. D) none of the above 7 Which of the following theories suggests that firms seek to penetrate new markets over time? A) theory of comparative advantage. B) imperfect markets theory. C) product cycle theory. D) none of the above 8 Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries? A) assembly line production. B) specialized professional services. C) nuclear missile planning. 9 10 11 12 13 14 15 16 17 18 D) planning for more sophisticated computer technology. Due to the risks involved in international business, firms should: A) only consider international business in major countries. B) maintain international business to no more than 20% of total business. C) maintain international business to no more than 35% of total business. D) none of the above The agency costs of an MNC are likely to be lower if it: A) scatters its subsidiaries across many foreign countries. B) increases its volume of international business. C) uses a centralized management style. D) A and B. An MNC may be more exposed to agency problems if most of its shares are held by: A) a few mutual funds B) a widely dispersed set of individual investors C) a few pension funds D) all of the above would prevent agency problems The Sarbanes-Oxley Act improves corporate governance of MNCs because it: A) makes executives more accountable for verifying financial statements B) eliminates stock options as a form of compensation C) ties executive compensation to firm performance D) places a limit on the amount of funds that managers can spend MNCs can improve their internal control process by all of the following, except: A) establishing a centralized data base of information B) ensuring that all data are reported consistently among subsidiaries C) ensuring that the MNC always borrows from countries where interest rates are lowest D) using a system that checks internal data for unusual discrepancies In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI. A) higher; higher B) higher; lower C) lower; lower D) lower; higher Which of the following is an example of direct foreign investment? A) exporting to a country. B) establishing licensing arrangements in a country. C) purchasing existing companies in a country. D) investing directly (without brokers) in foreign stocks. ____ are most commonly classified as a direct foreign investment. A) Foreign acquisitions B) Purchases of international stocks C) Licensing agreements D) Exporting transactions 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. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____. A) a specialized sales or service strategy; its technology 19 20 21 22 23 24 25 26 B) its technology; a specialized sales or service strategy C) its technology; its technology D) a specialized sales or service strategy; a specialized sales or service strategy E) its technology; an initial investment Which of the following is not a way in which agency problems can be reduced through corporate control? A) executive compensation. B) threat of hostile takeover. C) acquisition of a foreign subsidiary. D) monitoring by large shareholders. International trade: A) is a relatively conservative approach to foreign market penetration. B) entails minimal risk. C) does not require large amount of investment. D) all of the above. Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation? A) International Trade B) Licensing C) Franchising D) Direct foreign investment The MNC's value depends on all of the following, except: A) MNC's required rate of return B) Amount of MNC's cash flows in particular currency C) The exchange rate at which cash flows are converted to dollars D) The value of MNC depends on all of the above factors Which of the following is not an example of political risk? A) Government may impose taxes on subsidiary B) Government may impose barriers on subsidiary C) Consumers may boycott the MNC D) Consumers' income levels will decrease, thus decreasing consumption. International trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business. A) higher; lower B) higher; higher C) lower; higher D) lower; lower Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co? A) Joint venture B) Licensing C) Partial acquisition of existing Japanese firm D) Establishment of Japanese subsidiary Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co? A) $200,000 B) $559,500 C) $582,500 27 28 29 30 31 32 33 D) $393,500 Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value? A) A weaker Mexican economy B) Lower Mexican interest rates C) Depreciation of the Mexican peso D) Appreciation of the Mexican peso. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations. A) depreciates; appreciates B) appreciates; appreciates C) appreciates; depreciates D) depreciates; depreciates Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.? A) $100,000 B) $200,000 C) $160,000 D) $60,000 The goal of a multinational corporation (MNC) is A) The minimization of taxes remitted from foreign subsidiaries. B) The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. C) The maximization of shareholder wealth. D) The maximization of social benefits resulting from actions such as the employment of foreign managers. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because A) Monitoring of managers located in foreign countries is more difficult. B) Foreign subsidiary managers raised in different cultures may not follow uniform goals. C) MNCs are relatively large. D) All of the above E) A and B only Which of the following is not one of the more common methods used by MNCs to improve their internal control process? A) Establishing a centralized database of information B) Ensuring that all data are reported consistently among subsidiaries C) Speeding the process by which all departments and all subsidiaries have access to the data that they need D) Making executives more accountable for financial statements by personally verifying their accuracy E) All of the above are common methods used by MNCs to improve their internal control process. Which of the following is not mentioned in the text as a theory of international business? A) Theory of Comparative Advantage B) Imperfect Markets Theory C) Product Cycle Theory D) Globalization of Business Theory E) All of the above are mentioned in the text as theories of international business 34 The most risky method(s) by which firms conduct international business is (are): A) Franchising. B) The acquisitions of existing operations. C) The establishment of new subsidiaries. D) All of the above E) B and C only 35 The least risky method by which firms conduct international business is: A) Franchising. B) The acquisitions of existing operations. C) International Trade. D) The establishment of new subsidiaries. E) Licensing 36 Which of the following does not constitute a form of direct foreign investment? A) Franchising B) International trade C) Joint ventures D) Acquisitions of existing operations E) Establishment of new foreign subsidiaries True/False Indicate whether the statement is true or false. 1 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 2 Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits. A) True B) False 3 Franchising is the process by which national governments sell state owned operations to corporations and other investors. A) True B) False 4 The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. A) True B) False 5 If a publicly-traded MNC's managers make poor decisions that reduce its value, it may encourage other firms to acquire it. A) True B) False 6 Institutional investors such as mutual funds or pension funds which have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC. A) True B) False 7 Imperfect markets represent conditions under which factors of production are immobile. A) True B) False 8 The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors. A) True B) False 9 If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders). A) True B) False 10 The valuation of an MNC is reduced if the required return on its investments in foreign countries is reduced. A) True B) False 11 The goal of a multinational corporation (MNC) is the maximization of shareholder wealth. A) True B) False 12 A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs. A) True B) False 13 If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product. A) True B) False 14 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 15 One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems. A) True B) False 16 A centralized management style for an MNC results in relatively high agency costs. A) True B) False 17 The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources. A) True B) False 18 If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. A) True B) False 19 The acquisition of a foreign subsidiary is commonly considered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size. A) True B) False 20 If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. A) True B) False 21 If markets were perfect, then labor and other costs of production would be easily transferable. A) True B) False 22 The valuation of MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries. A) True B) False 23 A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC. A) True B) False 24 Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk. A) True B) False 25 A decentralized management style of MNC results in relatively high agency costs. A) True B) False 26 The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size. A) True B) False 27 A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC. A) True B) False 28 An MNC will always use the same required rate of return in the valuation of foreign projects, as it would for its domestic projects. A) True B) False 29 A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time. A) True B) False 30 If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. A) True B) False 31 A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations. A) True B) False 32 U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs. A) True B) False 33 The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm. A) True B) False 34 The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation. A) True B) False 35 Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources. A) True B) False 36 Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting. A) True B) False 37 Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries. A) True B) False 38 International trade is the most common form of direct foreign investment (DFI). A) True B) False 39 When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency. A) True B) False 40 A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. A) True B) False 41 One form of an exposure to political risk is terrorism. A) True B) False Chapter 1 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 ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerB D B A B C A D C B A C D C A C B C D D D D D B B C A C C D E D E C B PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 TRUE/FALSE 1 Register to View Answer PTS: 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 ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerF T T F T T F F T F F F T F T T F F T F F F T T F F F F T F T F F T T F F T T PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Chapter 3 Multiple Choice Identify the choice that best completes the statement or answers the question. spot rate. 1. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask 7. Which of the following is not true with respect to percentage spread is: spot market liquidity? A) about 4.99%. A) The more willing buyers and sellers there are, B) about 4.88%. the more liquid a market is. C) about 4.65%. B) The spot markets for heavily traded currencies D) about 4.43%. such as the Japanese yen are very liquid. C) A currency's liquidity affects the ease with 2. The bid/ask spread for small retail transactions is which an MNC can obtain or sell that currency. commonly in the range of ____ percent. D) If a currency is illiquid, an MNC is typically A) 3 to 7 able to quickly purchase that currency at a B) .01 to .03 reasonable exchange rate. C) 10 to 15 D) .5 to 1 8. Forward markets for currencies of developing countries are: 3. ____ is not a factor that affects the bid/ask spread. A) prohibited. A) Order costs B) less liquid than markets for developed B) Inventory costs countries. C) Volume C) more liquid than markets for developed D) All of the above factors affect the bid/ask countries. spread D) only available for use by government agencies. 4. According to the text, the forward rate is commonly used for: 9. A forward contract can be used to lock in the ____ A) hedging. of a specified currency for a future point in time. B) immediate transactions. A) purchase price C) previous transactions. B) sale price D) bond transactions. C) A or B D) none of the above 5. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 10. The forward market: 100,000 in 90 days, it could: A) for euros is very illiquid. A) obtain a 90-day forward purchase contract on B) for Eastern European countries is very liquid. euros. C) does not exist for some currencies. B) obtain a 90-day forward sale contract on euros. D) none of the above C) purchase euros 90 days from now at the spot 11. ____ is not a bank characteristic important to rate. customers in need of foreign exchange. D) sell euros 90 days from now at the spot rate. A) Quote competitiveness B) Speed of execution 6. If a U.S. firm desires to avoid the risk from C) Forecasting advice exchange rate fluctuations, and it will need D) Advice about current market conditions C$200,000 in 90 days to make payment on imports E) All of the above are important bank from Canada, it could: characteristics to customers in need of foreign A) obtain a 90-day forward purchase contract on exchange. Canadian dollars. B) obtain a 90-day forward sale contract on 12. The Basel II accord is focused on eliminating Canadian dollars. inconsistencies in ____ across countries. C) purchase Canadian dollars 90 days from now at A) capital requirements the spot rate. B) deposit rates D) sell Canadian dollars 90 days from now at the C) deposit insurance 13. 14. 15. 16. 17. 18. D) bank failure policies The international money market primarily concentrates on: A) short-term lending (one year or less). B) medium-term lending. C) long-term lending. D) placing bonds with investors. E) placing newly issued stock in foreign markets. The international credit market primarily concentrates on: A) short-term lending (less than one year). B) medium-term lending. C) long-term lending. D) providing an exchange of foreign currencies for firms who need them. E) placing newly issued stock in foreign markets. The main participants in the international money market are: A) consumers. B) small firms. C) large corporations. D) small European firms needing European currencies for international trade. LIBOR is: A) the interest rate commonly charged for loans between banks. B) the average inflation rate in European countries. C) the maximum loan rate ceiling on loans in the international money market. D) the maximum deposit rate ceiling on deposits in the international money market. E) the maximum interest rate offered on bonds that are issued in London. A syndicated loan: A) represents a loan by a single bank to a syndicate of corporations. B) represents a loan by a single bank to a syndicate of country governments. C) represents a direct loan by a syndicate of oil-producing exporters to a less developed country. D) represents a loan by a group of banks to a borrower. E) A and B The international money market is primarily served by: A) the governments of European countries, which directly intervene in foreign currency markets. B) government agencies such as the International 19. 20. 21. 22. 23. 24. Monetary Fund that enhance development of countries. C) several large banks that accept deposits and provide loans in various currencies. D) small banks that convert foreign currency for tourists and business visitors. International money 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. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward. A) depreciate; buying B) depreciate; selling C) appreciate; selling D) appreciate; buying The bid-ask spread on an exchange rate can be used to directly determine: A) how an exchange rate will change. B) the transaction cost of foreign exchange. C) the forward premium. D) the currency option premium. Futures contracts are typically ____; forward contracts are typically ____. A) sold on an exchange; sold on an exchange B) offered by commercial banks; sold on an exchange C) sold on an exchange; offered by commercial banks D) offered by commercial banks; offered by commercial banks Which of the following is true? A) Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. B) U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. C) U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries. D) A and B Which currency is used the most to denominate Eurobonds? 25. 26. 27. 28. 29. A) the British pound. B) the Japanese yen. C) the U.S. dollar. D) the Swiss franc. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the: A) closing prices in the U.S. during the previous day. B) closing prices in Canada during the previous day. C) prevailing prices in locations where the foreign exchange markets have been open. D) officially set by central banks before the U.S. market opens. The U.S. dollar is not ever used as a medium of exchange in: A) industrialized countries outside the U.S. B) in any Latin American countries. C) in Eastern European countries where foreign exchange restrictions exist. D) none of the above 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. 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. D) 0.014. E) none of the above The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____. A) 48.90 B) 146.70 C) 55.21 30. 31. 32. 33. 34. 35. 36. D) none of the above In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except: A) more voting rights for shareholders. B) more legal protection. C) more enforcement of the laws. D) less stringent accounting requirements. If companies can rely on stock markets to obtain funds, they will have to rely more on heavily the ____ market to raise long-term funds. A) derivative B) long-term credit C) money D) foreign exchange Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? A) 12,600 B) 775,194 C) 793,651 D) 12,900 An obligation to purchase a specific amount of currency at a future point in time is called a: A) call option B) spot contract C) put option D) forward contract E) both B and D Which of the following is not a method that can be used to invest internationally? A) Investment in MNC stocks B) American depository receipts (ADRs) C) World Equity benchmark Shares (WEBS) D) International mutual funds E) All of the above are methods that can be used to invest internationally. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is A) .01 B) 118 C) 1.18 D) .0087 When obtaining a loan, the risk premium paid above LIBOR depends on the: A) risk-free interest rate of the borrower. B) credit risk of the borrower. C) borrower's stock price. 37. 38. 39. 40. 41. 42. 43. D) lender's stock price. The largest global exchange is: A) NASDAQ B) Tokyo Stock Exchange C) NYSE Euronext D) London Stock Exchange Which of the following is not true about syndicated loans? A) A borrower that receives a syndicated loan incurs various fees besides the interest rate. B) The loans are only denominated in U.S. dollars. C) The loans are provided by a group of banks to a borrower. D) The loans are usually formed in 6 weeks or less. The interest rate on the syndicated loan depends on the: A) currency denominating the loan. B) maturity of the loan. C) creditworthiness of the borrower. D) interbank lending rate. E) all of the above. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation: A) Buy dollars forward B) Sell dollars forward C) Purchase call option D) Purchase put option Certificates representing bundles of stock of non-U.S. firms are called: A) Eurobonds B) ADRs C) FRNs D) Eurobor Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars? A) 10 B) 13.28 C) 30.12 D) 39.84 Which of the following is not true regarding ADRs? A) ADRs are denominated in the currency of the 44. 45. 46. 47. stock's home country. B) ADRs enable U.S. investors to avoid cross-border transactions C) ADRs allow non-U.S. firms to tap into U.S. market for funds. D) ADRs sometimes allow for arbitrage opportunities. Which of the following is not a possible bid/ask quotation for the Barbados dollar? A) $.50/$.51 B) $.49/$.50 C) $.52/$.51 D) $.51/$.52 E) All of the above are possible bid/ask quotations. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? A) $44,500 B) $45,000 C) $526 million D) $47,500 E) $556 million Which of the following is probably not an example of the use of forward contracts by an MNC? A) Hedging pound payables by selling pounds forward B) Hedging peso receivables by selling pesos forward C) Hedging yen payables by purchasing yen forward D) Hedging peso payables by purchasing pesos forward E) All of the above are examples of using forward contracts. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation. A) direct; indirect B) indirect; direct C) direct; direct D) indirect; indirect E) cannot be answered without more information 48. You observe a quotation of the Japanese yen () of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ /$. A) direct; 142.86 B) indirect; 142.86 C) indirect; 150 D) direct; 150 E) indirect; 0 49. Which of the following is not true regarding electronic communications networks (ECNs)? A) They have a visible trading floor. B) Trades are executed by a computer network. C) They have been created in many countries to match orders between buyers and sellers. D) They allow investors to place orders on their computers. E) All of the above are true. 50. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables? A) Purchase pounds forward B) Buy a pound futures contract C) Buy a pound put option D) Buy a pound call option 51. Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC's needs. A) more standardized; standardized B) more standardized; custom-tailored C) more custom-tailored; standardized D) more custom-tailored; custom-tailored E) less standardized; custom-tailored 52. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market. A) international money; international credit B) international money; international bond C) international credit; international money D) international bond; international credit E) international money; international stock True/False Indicate whether the statement is true or false. 53. The forward rate is the exchange rate used for immediate exchange of currencies. A) True B) False 62. The strike price is also known as the premium price. A) True B) False 54. The ask quote is the price for which a bank offers to sell a currency. A) True B) False 63. The interest rate commonly charged for loans between banks is called the cross rate. A) True B) False 55. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. A) True B) False 64. The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. A) True B) False 56. The existence of imperfect markets has prevented the internationalization of financial markets. A) True B) False 57. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold. A) True B) False 58. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction. A) True B) False 59. The Single European Act prevented a trend toward increased globalization in the banking industry. A) True B) False 60. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. A) True B) False 61. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. A) True B) False 65. The Basel Accord is an agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries. A) True B) False 66. A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. A) True B) False 67. Eurobonds are certificates representing bundles of stock. A) True B) False 68. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low. A) True B) False 69. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low. A) True B) False 70. The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market. A) True B) False 71. Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies. A) True B) False 72. The term "eurobor" is widely used to reflect the interbank offer rate on euros. A) True B) False 73. The term "eurobor" is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth. A) True B) False 74. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market. A) True B) False 75. In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States. A) True B) False 76. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. A) True B) False 77. Shareholders have more voting power in some countries than others. A) True B) False 78. Shareholders can have influence on a wider variety of management issues in some countries. A) True B) False 79. The legal protection of shareholders is the same among countries. A) True B) False 80. Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud. A) True B) False 81. In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy. A) True B) False 82. The government enforcement of securities laws varies among countries. A) True B) False 83. The degree of financial information that must be provided by public companies is the same among countries. A) True B) False 84. In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders. A) True B) False 85. The strike price on a currency option is also known as an exercise price. A) True B) False 86. When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency. A) True B) False 87. The interest rate in developing countries is usually very low. A) True B) False 88. The more intense the competition for the traded currency, the larger the bid/ask spread. A) True B) False 89. Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies. A) True B) False 90. At any given point in time, a bank's bid quote will be greater than its ask quote. A) True B) False 91. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations. A) True B) False 92. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. A) True B) False 93. The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies. A) True B) False 94. The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets. A) True B) False Chapter 3 Answer Section MULTIPLE CHOICE 1. Register to View AnswerSOLUTION: 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. PTS: 1 Register to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerSOLUTION: PTS: 1 29. Register to View AnswerSOLUTION: PTS: 1 30. Register to View Answer31. Register to View Answer Bid-ask percentage spread = ($.0043 $.0041)/$.0043 = 4.65% PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ($.008/$.59) = F$.014/ 3 30 $1.63 = $146.70 PTS: 1 PTS: 1 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerD E D B C B E C B A A C D A A B A C B A PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 TRUE/FALSE 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerT F F T F F T F F F F F T F T F F T T F T 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerF T T F T T T F F T F F F F F F F T T PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 CHAPTER 1 Multinational Financial Management: An Overview International Financial Management The MNC and its Goal Goal Conflicts The Agency Problem, and Other Constraints International Risk Exposure Justifying International Business International Business Methods International Opportunities 1-1 Multinational/ International Financial Management Managing company-wide (domestic and international) resources to accomplish organizational goals. Recognizing the effects of international economic conditions (fluctuations in foreign exchange rates, interest rates, and inflation) on production costs, pricing policies, and cash flows. Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-2 1 The MNC and its Goal Multinational Corporation (MNC) A firm that engages in some form of international business. Examples: Coca-Cola Co., IBM, Nike. Main Goal To maximize MNC shareholder wealth/ net worth. Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-3 The Agency Problem A conflict of goals between the owners (principals) of a firm and its managers (agents). Managerial decision to expand operations may not necessarily maximize shareholder wealth. On the contrary, it may be an excuse to increase managerial responsibility and compensation. Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-4 2 Other Constraints Environmental pollution controls, building controls, etc. Regulatory taxation policies, foreign exchange remittance restrictions, etc. Ethical business standards or codes of conduct. Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-5 International Risk Exposure Exchange Rate Movements Foreign Economic Conditions Asian Crisis of 1997-1998 Week European Economic Condition in 1992-1993 and 2000-2001 Political Conditions 9-11 Terrorist Attack Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-6 3 Justifying International Business Theory of Comparative Advantage Imperfect Markets Theory Specialization: technology (Japan); manufacturing (China) Restricted mobility of resources Product Cycle Theory Expanding product specialization in foreign countries Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-7 International Business Methods International Trade Boeing, GE, IBM Licensing AT&T, Sprint, Verizon Franchising DQ, McDonalds, Subway Joint Ventures Xerox and Fuji Acquisitions Amex, Home Depot Subsidiary Setups Halliburton Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-8 4 International Opportunities Latin America Europe Asia Chapter 1: Multinational Financial Management: An Overview Dr. Chet Singh 1-9 CHAPTER 1 Multinational Financial Management: An Overview 1-10 5 CHAPTER 3 International Financial Markets International Financial Markets Factors Affecting Lending and Borrowing Activities Foreign Exchange (FX) Market Bid/Ask Spread, Exchange Rate, Cross Exchange Rate History, Types (Spot, Forward, Futures, Options) Eurodollar/ Eurocurrency Market Factors Affecting the Eurodollar/ Eurocurrency Market Eurocredit Market Eurobond Market International Stock Markets Factors Affecting the Eurobond Market Factors Affecting International Stock Markets 3-1 International Financial Markets International Financial Markets are used to facilitate international business transactions. Foreign Exchange (FX) Market Eurodollar/ Eurocurrency Market Eurocredit Market Eurobond Market International Stock Markets Chapter 3: International Financial Markets Dr. Chet Singh 3-2 1 International Financial Markets: Factors Affecting Lending & Borrowing Activities Factors Creditors (Lenders) and Investors Debtors (Borrowers) Foreign Exchange-Rate Expectations Expected appreciation in the FC is favorable Expected depreciation in the FC is favorable Foreign Interest Rates A relatively high foreign interest rate is favorable A relatively low foreign interest rate is favorable International Diversification International diversification is favorable since the benefits of risk reduction flow to the creditors and investors N/A Chapter 3: International Financial Markets Dr. Chet Singh 3-3 Foreign Exchange (FX) Market Allow currency exchanges in order to facilitate international trade and/ or financial transactions. Commercial banks and other financial institutions across the globe act as financial intermediaries that stand ready to exchange one currency for another on the spot or on some future date. For facilitating the exchange of currencies, banks charge a transaction fee = Bid/Ask spread (Ask rate minus Bid rate) for a foreign currency (FC). Bid rate is the exchange rate at which the bank buys the FC Ask rate is the exchange rate at which the bank sells the FC In general, the ask rate is greater than the bid rate. Chapter 3: International Financial Markets Dr. Chet Singh 3-4 2 Foreign Exchange (FX) Market: Exchange Rate An exchange rate (ER), from the US perspective, expresses the value of a FC relative to the USD. Exchange rates are listed as Direct and Indirect Quotations. Direct Quote expresses the value of one unit of FC in terms of US dollars. Indirect Quote expresses the value of one USD in terms of the units of FC. Example: 1 NZD=0.50 USD or 0.50 USD/1 NZD => 1 USD=2.00 NZD or 2.00 NZD/1 USD One quote is the reciprocal of the other. Chapter 3: International Financial Markets Dr. Chet Singh 3-5 Foreign Exchange (FX) Market: Cross Exchange Rate Cross Exchange Rate (CER) expresses the relationship between two non-dollar currencies. It expresses the value of one unit of FCx in units of FCy via a common currency, such as, the USD. Value of 1 unit of FCx in units of FCy = FCy /1 FCx = Value of 1 unit of FCx in USD Value of 1 unit of FCy in USD = (USD /1 FCx) (USD /1 FCy) Chapter 3: International Financial Markets Dr. Chet Singh 3-6 3 Foreign Exchange (FX) Market: Cross Exchange Rate - Example Given: 1 NZD=0.50 USD, and 1 CAD=0.80 USD Express the value of 1 CAD in units of NZD Solution: Value of 1 CAD in units of NZD = NZD /1 CAD = Value of 1 CAD in USD Value of 1 NZD in USD = (0.80 USD /1 CAD) (0.50 USD /1 NZD) = 1.60 NZD /1 CAD Chapter 3: International Financial Markets Dr. Chet Singh 3-7 Foreign Exchange (FX) Market: Cross Exchange Rate - Question Given: 1 CAD = 0.80 USD, and 1 CAD = 1.60 NZD What is the value of 1 USD in CAD? What is the value of 1 NZD in USD? Solution: Indirect ER=1/Direct ER=1/0.80=1.25 CAD/1 USD Common Currency is CAD. Therefore, CER: (0.625 CAD/1 NZD) (1.25 CAD/1 USD) = 0.50 USD/ 1 NZD Chapter 3: International Financial Markets Dr. Chet Singh 3-8 4 Foreign Exchange (FX) Market: History Gold Standard (1876-1913) Peg currency values to a real asset (gold): Exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold. Fixed Exchange Rates (1944-1973) Bretton Woods Agreement (1944): exchange-rate fluctuations restricted to 1% from initial levels. Smithsonian Agreement (1971): exchange-rate fluctuations restricted to 2% from post-USD-devaluation levels. Floating Exchange Rates (1973+) Exchange rates allowed to fluctuate according to the market forces of demand and supply without the imposition of exchange-rate fluctuation limits. Chapter 3: International Financial Markets 3-9 Dr. Chet Singh Foreign Exchange (FX) Market: Types Spot Market: Allows the immediate exchange of currencies. Forward Market: Allows commercial banks to purchase and sell specified units of a currency, at a predetermined future point in time and at a preset exchange rate (forward rate), on behalf of customers (MNCs) through a negotiated settlement (forward contract). Currency Futures Market: Allows brokerage firms to purchase and sell a standard volume of a particular currency on a specific settlement date on behalf of customers (MNCs and individuals) through an exchange-traded standardized (futures) contract. Currency Options Market: Allows brokerage firms to purchase and sell standardized currency options on an exchange on behalf of customers (MNCs and individuals). Chapter 3: International Financial Markets Dr. Chet Singh 3-10 5 Eurodollar/ Eurocurrency (International Money) Market Eurobanks: Large foreign banks that accept USD deposits and provide short-term (< 1 year) loans in large denominations and in various currencies. LIBOR: The interest rate charged for loans between Eurobanks is known as the London Interbank Offer Rate. Eurodollars: USD deposits in banks located in Europe and other foreign countries. Petrodollars dollar deposits maintained by OPEC countries. Eurobank Syndicate: Group of Eurobanks that participate in underwriting loans. Chapter 3: International Financial Markets Dr. Chet Singh 3-11 Factors Affecting the Eurodollar/ Eurocurrency Market 1968 US Banking Regulations Limitations on foreign lending by US banks, ceilings on interest rates offered on deposits in the US, and reserve requirements. Eurodollars not subjected to interest-rate ceilings and reserve requirements. 1988 Basel Accord Agreement to establish standardized risk-based capital requirements for banks across a number of countries. Basel Accord classifies the capital based on the riskiness of the assets; the riskier the assets, the higher the required capital ratio. 1992 Single European Act Set of regulations that intended to remove barriers on trade and capital flows between European Countries. Standardization, Expansion privileges, Multiple offerings (lending, leasing, securitization): extended to US banks that enter Europe. Chapter 3: International Financial Markets Dr. Chet Singh 3-12 6 Eurocredit Market Eurobanks that make mid-to-long-term loans (> 1 year; mostly 5 years) Interest rate on Eurocredit loans floats or changes with the LIBOR (+%premium) The %premium paid above LIBOR is greater (smaller) the higher (lower) the borrowers credit risk. Chapter 3: International Financial Markets Dr. Chet Singh 3-13 Eurobond Market Access to long-term funds in foreign markets through international bond issues. Foreign Bond: A bond issued by a foreign firm in a country represented by the currency denominating the bond. Examples: Samurai Bond is a Yen-denominated bond issued in Japan by a non-Japanese borrower. Yankee Bond is a USD-denominated bond issued in the US by a non-US borrower. Parallel bonds: Bonds issued by a foreign firm in various countries, with each bond issue denominated in the currency of the country in which it is sold. Eurobond: A bond issued in a country other than the country represented by the currency denominating the bond. Example: USD-denominated bond issued by US-based MNC in Japan. Chapter 3: International Financial Markets Dr. Chet Singh 3-14 7 Factors Affecting the Eurobond Market 1963 Interest Equalization Tax (repealed in 1984): Imposed restrictions on investment by US (foreign) investors in foreign (US) securities. Interest-Rate Movements: Eurobond issuers prefer to place bond issues when the interest rate for the currency denominating the bonds is relatively lower. Credit-Risk Differentials: Eurobond issuers prefer to place bonds in countries where the investors require a small premium above the countrys risk-free rate to account for the likelihood of default by the borrower (MNC). Secondary Eurobond Market: Active secondary market makes the Eurobonds more liquid as an instrument. Unified European Currency: European-MNCs can now issue Eurodenominated bonds in various countries. Chapter 3: International Financial Markets Dr. Chet Singh 3-15 International Stock Markets MNCs can attract long-term funds from either domestic investors by issuing stock domestically, or foreign investors by issuing stock internationally. Yankee Stock Offering: FC stock issue in the US. American Depository Receipt: A certificate of ownership of one or more shares of the underlying FC stock, which entitles the shareholder/ investor to all dividends and capital gains. World Equity Benchmark Shares/iShares/Exchange Traded Funds: Represent established market indexes (stock composites), but trade as a single stock. Chapter 3: International Financial Markets Dr. Chet Singh 3-16 8 Factors Affecting International Stock Markets Unified European Currency: Since the stock can be denominated in Euros, there is no need to raise money in French Francs and convert into German Marks. Stock Exchange Alliances: Allow shares of companies to be traded across several exchanges. Merger of Euronext and NYSE conditionally approved on January 11, 2007. Electronic Communications Network: Computer network that enable stock transactions between buyers and sellers (match buy and sell orders) without a visible trading floor. Chapter 3: International Financial Markets Dr. Chet Singh 3-17 CHAPTER 3 International Financial Markets 3-18 9
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