Practice Problems
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Practice Problems

Course: FINANCE 375, Spring 2013

School: Rutgers

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M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 1 G l o b a l i z a t i o n a n d t h e M u l t i n a t i on a l E n t e r p r i se 1.1 Globalization and Creating Value in the Multinational Enterprise M u l t i p l e C hoi c e 1) Which of the following are critical to a firm trying to reach the top of the "firm value pyramid"? A) An open market place. B)...

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u M l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 1 G l o b a l i z a t i o n a n d t h e M u l t i n a t i on a l E n t e r p r i se 1.1 Globalization and Creating Value in the Multinational Enterprise M u l t i p l e C hoi c e 1) Which of the following are critical to a firm trying to reach the top of the "firm value pyramid"? A) An open market place. B) High quality strategic management. C) Access to capital. D) all of the above Register to View AnswerDiff: 2 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Conceptual 2) A well-established, large U.S.-based MNE will probably NOT be able to overcome which of the following obstacles to maximizing firm value? A) An open market place. B) High quality strategic management. C) Access to capital. D) none of the above Register to View AnswerDiff: 2 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Recognition 3) A well-established, large China-based MNE will probably be most adversely affected by which of the following elements of firm value? A) An open marketplace. B) High-quality strategic management. C) Access to capital. D) Access to qualified labor pool. Register to View AnswerDiff: 2 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Conceptual 1 Copyright 2010 Pearson Education, Inc. ! 4) A well-established, large, Brazil-based MNE will probably be most adversely affected by which of the following elements of firm value? A) An open marketplace. B) High-quality strategic management. C) Access to capital. D) Access to qualified labor pool. Register to View AnswerDiff: 2 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Conceptual T r u e/ F a l se 1) Three necessary conditions for a firm to reach the top of the "firm value pyramid" are an open market place, high quality strategic management, and access to capital. Register to View AnswerDiff: 1 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Conceptual 2) Comparative advantage is one of the underlying principles driving the growth of global business. Register to View AnswerDiff: 1 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Recognition E ssa y 1) List and explain three strategic motives why firms become multinationals and give an example of each. Answer: The authors provide 5 strategic motives for firms to become multinationals: market seekers, raw materials seekers, production efficiency seekers, knowledge seekers, and political safety seekers. Market seekers are looking for more consumers for their products such as automobiles or steel. Knowledge seekers may be looking for an educated work force similar to the way firms seeking R and D set up shop in university towns. Raw materials seekers may be after commodities such as oil or copper. Production efficiencies may occur in countries like Mexico that have capable workers and lower wages. Political safety seekers are looking for countries that will not expropriate their assets, so they may stay away from countries that in the post have engaged in such activities. Diff: 3 Topic: 1.1 Globalization and Creating Value in the Multinational Enterprise Skill: Conceptual 2 Copyright 2010 Pearson Education, Inc. ! 1.2 The Theory of Comparative Advantage M u l t i p l e C hoi c e 1) The theory that suggests specialization by country can increase worldwide production is ________. A) the theory of comparative advantage B) the theory of foreign direct investment C) the international Fisher effect D) the theory of working capital management Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 2) Which of the following is NOT a reason governments interfere with comparative advantage? A) Governments attempt to achieve full employment. B) Governments promote economic development. C) National self-sufficiency in defense-related industries. D) All are reasons governments interfere with comparative advantage. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 3) Which of the following factors of production DO NOT flow freely between countries? A) Raw materials B) Financial capital C) (Non-military) Technology D) All of the above factors of production flow freely among countries. Register to View AnswerDiff: 1 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 4) Which of the following would NOT be a way to implement comparative advantage? A) IBM exports computers to Egypt. B) Computer hardware is designed in the United States but manufactured and assembled in Korea. C) Water of the greatest purity is obtained from wells in Oregon, bottled, and exported worldwide. D) All of the above are examples of ways to implement comparative advantage. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Conceptual 3 Copyright 2010 Pearson Education, Inc. ! 5) Of the following, which would NOT be considered a way that government interferes with comparative advantage? A) Tariffs. B) Managerial skills. C) Quotas. D) Other non-tariff restrictions. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition T r u e/ F a l se 1) The theory of comparative advantage owes it origins to Ben Bernanke as described in his book T h e W e a l t h o f B a n k e r s. Register to View AnswerDiff: 1 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 2) International trade might have approached the comparative advantage model in the 19th century, and it does so even more today. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Conceptual 3) Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 4) Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet. Register to View AnswerDiff: 1 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 5) Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs. Register to View AnswerDiff: 2 Topic: 1.2 The Theory of Comparative Advantage Skill: Recognition 4 Copyright 2010 Pearson Education, Inc. ! 1.3 What Is Different about Global Financial Management? M u l t i p l e C hoi c e 1) Which of the following domestic financial instruments have NOT been modified for use in international financial management? A) Currency options and futures. B) Interest rate and currency swaps. C) Letters of credit. D) All of the above are domestic financial instruments that have also been modified for use in international financial markets. Register to View AnswerDiff: 2 Topic: 1.3 What Is Different about Global Financial Management? Skill: Recognition T r u e/ F a l se 1) MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities. Register to View AnswerDiff: 2 Topic: 1.3 What Is Different about Global Financial Management? Skill: Recognition 1.4 Market Imperfections: A Rationale for the Existence of the Multinational Firm M u l t i p l e C hoi c e 1) In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market seeking firms produce in foreign countries? A) Satisfaction of local demand in the foreign country. B) Satisfaction of local demand in the domestic markets. C) Political safely and small likelihood of government expropriation of assets. D) All of the above are market-seeking activities. Register to View AnswerDiff: 2 Topic: 1.4 Market Imperfections: A Rationale for the Existence of the Multinational Firm Skill: Recognition 5 Copyright 2010 Pearson Education, Inc. ! 2) ________ investments are designed to promote and enhance the growth and profitability of the firm. ________ investments are designed to deny those same opportunities to the firm's competitors. A) Conservative; Aggressive B) Defensive; Proactive C) Proactive; Defensive D) Aggressive; Proactive Register to View AnswerDiff: 2 Topic: 1.4 Market Imperfections: A Rationale for the Existence of the Multinational Firm Skill: Recognition T r u e/ F a l se 1) For firms competing in a world characterized by oligopolistic competition, strategic motives can be subdivided into proactive and defensive investments. Register to View AnswerDiff: 1 Topic: 1.4 Market Imperfections: A Rationale for the Existence of the Multinational Firm Skill: Recognition 2) Defensive measures are designed to enhance growth and profitability of the firm itself. Register to View AnswerDiff: 1 Topic: 1.4 Market Imperfections: A Rationale for the Existence of the Multinational Firm Skill: Recognition 1.5 The Globalization Process M u l t i p l e C hoi c e 1) The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the A) domestic phase. B) multinational phase. C) international trade phase. D) import-export banking phase. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition 6 Copyright 2010 Pearson Education, Inc. ! 2) The authors describe the multinational phase of globalization for a firm as one characterized by the A) ownership of assets and enterprises in foreign countries. B) potential for international competitors or suppliers even though all accounts are with domestic firms and are denominated in dollars. C) imports from foreign suppliers and exports to foreign buyers. D) requirement that all employees be multilingual. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition 3) A firm in the International Trade Phase of Globalization A) makes all foreign payments in foreign currency units and all foreign receipts in domestic currency units. B) receives all foreign receipts in foreign currency units and makes all foreign payments in domestic currency units. C) bears direct foreign exchange risk. D) none of the above Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Conceptual 4) Of the following, which was NOT mentioned by the authors as an increase in the demands of financial management services due to increased globalization by the firm? A) Evaluation of the credit quality of foreign buyers and sellers. B) Foreign consumer method of payment preferences. C) Credit risk management. D) Evaluation of foreign exchange risk. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition 5) Of the following, which was NOT mentioned by the authors as an increase in the demands of financial management services due to increased globalization by the firm? A) Evaluation of the credit quality of foreign buyers and sellers. B) Foreign consumer method of payment preferences. C) Credit risk management. D) Evaluation of foreign exchange risk. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition 7 Copyright 2010 Pearson Education, Inc. ! 6) The authors describe the multinational phase of globalization for a firm as one characterized by the A) ownership of assets and enterprises in foreign countries. B) potential for international competitors or suppliers even though all accounts are with domestic firms and are denominated in dollars. C) imports from foreign suppliers and exports to foreign buyers. D) requirement that all employees be multilingual. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition 7) The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm. A) Rulers of sovereign states and unsavory customs officials. B) Corporate insiders and attorneys. C) Corporate insiders and rulers of sovereign states. D) Attorneys and unsavory customs officials. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Recognition T r u e/ F a l se 1) Typically, a firm in its domestic stage of globalization has all financial transactions in its domestic currency. Register to View AnswerDiff: 1 Topic: 1.5 The Globalization Process Skill: Conceptual 2) Typically, a "greenfield" investment abroad is considered a greater foreign investment having a greater foreign presence than a joint venture with a foreign firm. Register to View AnswerDiff: 1 Topic: 1.5 The Globalization Process Skill: Recognition 3) The authors argue that financial inefficiency caused by influential insiders may prove to be an increasingly troublesome barrier to international finance. Register to View AnswerDiff: 2 Topic: 1.5 The Globalization Process Skill: Conceptual 8 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 2 F i n a n c i a l G oa ls a n d C o r po r a t e G o v e r n a n c e 2.1 Who Owns the Business? M u l t i p l e C hoi c e 1) Foreign stock markets are frequently characterized by controlling shareholders for the individual publicly traded firms. Which of the following is NOT identified by the authors as typical controlling shareholders? A) The government (for example, privatized utilities). B) Institutions (such as banks in Germany). C) Family (such as in France). D) All of the above were identified by the authors as controlling shareholders. Register to View AnswerDiff: 1 Topic: 2.1 Who Owns the Business? Skill: Recognition T r u e/ F a l se 1) In the U.S. and U.K. stock markets are characterized by ownership of firms concentrated in the hands of a few controlling shareholders. In contrast, the rest of the world tends to have more widespread ownership of shares. Register to View AnswerDiff: 1 Topic: 2.1 Who Owns the Business? Skill: Recognition 2.2 What Is the Goal of Management? M u l t i p l e C hoi c e 1) "Maximize corporate wealth" A) is the primary objective of the non-Anglo-American model of management. B) as a management objective treats shareholders on a par with other corporate stakeholders such as creditors, labor, and local community. C) has a broader definition than just financial wealth. D) all of the above Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 9 Copyright 2010 Pearson Education, Inc. ! 2) The Shareholder Wealth Maximization Model A) combines the interests and inputs of shareholders, creditors, management, employees, and society. B) is being usurped by the Stakeholder Capitalism Model as those types of MNEs dominate their global industry segments. C) clearly places shareholders as the primary stakeholder. D) is the dominant form of corporate management in the European-Japanese governance system. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 3) The Stakeholder Capitalism Model A) clearly places shareholders as the primary stakeholder. B) combines the interests and inputs of shareholders, creditors, management, employees, and society. C) has financial profit as its goal and is often termed impatient capital. D) is the Anglo-American model of corporate governance. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 4) In the Anglo-American model of corporate governance, the primary goal of management is to A) maximize the wealth of all stakeholders. B) maximize shareholder wealth. C) minimize costs. D) minimize risk. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 5) In finance, an efficient market is one in which A) prices are assumed to be correct. B) prices adjust quickly and accurately to new information. C) prices are the best allocators of capital in the macro economy. D) all of the above Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 10 Copyright 2010 Pearson Education, Inc. ! 6) Systematic risk can be defined as A) the total risk to the firm. B) the risk of the individual security. C) the risk of the market in general. D) the risk that can be systematically diversified away. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 7) Unsystematic risk can be defined as A) the total risk to the firm. B) the risk of the individual security. C) the added risk that a firm's shares bring to a diversified portfolio. D) the risk of the market in general. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 8) The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization model is called A) market efficiency. B) the SWM model. C) agency theory. D) the SCM model. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Recognition 9) Under the Shareholder Wealth Maximization Model of corporate governance, poor firm performance is likely to be faced with all but which of the following? A) Sale of shares by disgruntled current shareholders. B) Shareholder activism to attempt a change in current management. C) As a maximum threat, initiation of a corporate takeover. D) Prison time for executive management. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 11 Copyright 2010 Pearson Education, Inc. ! 10) Which of the following is a reason why managers act to maximize shareholder wealth in Anglo-American markets? A) The use of stock options to align the goals of shareholders and managers. B) The market for corporate control that allows for outside takeover of the firm. C) Performance based compensation for executive management. D) all of the above Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 11) Which of the following is NOT true regarding the stakeholder capitalism model? A) Banks and other financial institutions are less important creditors than securities markets. B) Labor unions are more powerful than in the Anglo-American markets. C) Governments interfere more in the marketplace to protect important stakeholder groups. D) All of the above are TRUE. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 12) The stakeholder capitalism model A) typically avoids the flaw of impatient capital. B) tries to meet the desires of multiple stakeholders. C) may leave management without a clear signal about tradeoffs among the several stakeholders. D) all of the above Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 13) Which of the following is generally NOT considered to be a viable operational goal for a firm? A) Maintaining a strong local currency. B) Maximization of after-tax income. C) Minimization of the firm's effective global tax burden. D) Correct positioning of the firm's income, cash flows and available funds as to country and currency. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 12 Copyright 2010 Pearson Education, Inc. ! 14) Which of the following operational goals for the international firm may be incompatible with the others? A) Maintaining a strong local currency. B) Maximization of after-tax income. C) Minimization of the firm's effective global tax burden. D) Each of these goals may be incompatible with one or more of the others. Register to View AnswerDiff: 2 Topic: 2.2 What is the Goal of Management Skill: Conceptual 15) The primary operational goal for the firm is to A) maximize after-tax profits in each country where the firm is operating. B) minimize the total financial risk to the firm. C) maximize the consolidated after-tax profits of the firm. D) maximize the total risk to the firm. Register to View AnswerDiff: 3 Topic: 2.2 What is the Goal of Management Skill: Conceptual T r u e/ F a l se 1) The stakeholder capitalism model holds that total risk (operational and financial) is more important than just systematic risk. A) True B) False Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 2) In recent years the trend has been for markets to increasing focus on the shareholder wealth form of wealth maximization. A) True B) False Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 3) Patient Capitalism is characterized by short-term focus by both management and investors. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Conceptual 13 Copyright 2010 Pearson Education, Inc. ! 4) Agency theory states that unsystematic risk can be eliminated through diversification. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 5) The stakeholder capitalism model does not assume that equity markets are either efficient or inefficient. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Conceptual 6) The stakeholder capitalism model assumes that only systematic risk "counts" or is a prime concern for management. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Conceptual 7) Dividend yield is the change in the share price of stock as traded in the public equity markets. Register to View AnswerDiff: 1 Topic: 2.2 What is the Goal of Management Skill: Recognition 14 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) Describe the management objectives of a firm governed by the shareholder wealth maximization model and one governed by the stakeholder wealth maximization model. Give an example of how these two models may lead to different decision-making by executive management. Answer: Shareholder wealth maximization attempts to do just that, typically through the maximization of share price. Stakeholder wealth maximization is much more difficult because of the necessity to satisfy many stakeholders all having approximately equal claim on the objectives of management. These stakeholders may include shareholders, creditors, customers, employees, and community. Differing decisions may occur in a situation that involves significant social costs. For example, in the U.S. the decision to shift production from a local factory to a foreign one may be in large based on the change in NPV as the result of the move with only minor consideration of the impact that a change in location would have on the community at large or the local employees. A manager of a stakeholder driven firm may place equal or greater emphasis on the local employees and community and choose to maintain the current facility rather than move even if the foreign operation provided a much greater NPV. Ultimately, the latter may cause an inefficient allocation of scarce resources and lead to an overall lower standard of living. Diff: 3 Topic: 2.2 What is the Goal of Management Skill: Conceptual 2.3 Corporate Governance M u l t i p l e C hoi c e 1) Which of the following broad topics is NOT identified as an area to be established as good corporate governance practice by the Organization for Economic Cooperation and Development (OECD)? A) Protect the rights of shareholders. B) Disclosure and transparency. C) The proper role of stakeholders in the governance of the firm. D) All of the above should be a concern of good corporate governance. Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 15 Copyright 2010 Pearson Education, Inc. ! 2) The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed ________. A) corporate governance B) Anglo-American activism C) capital structure D) working capital management Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 3) When discussing the structure of corporate governance, the authors distinguish between internal and external factors. ________ is an example of an internal factor, and ________ is an example of an external factor. A) Equity markets; executive management B) Debt markets; board of directors C) Executive management; auditors D) Auditors; regulators Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 4) Which of the following is NOT commonly associated with a government affiliated form of corporate governance regime? A) No minority influence. B) Lack of transparency. C) State ownership of enterprise. D) All are associated with this type of corporate governance regime. Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 5) Generally speaking, which of the following is NOT considered an important factor in the composition and control of corporate boards of directors? A) The number of insider vs outside directors. B) The total number of directors on the board. C) The composition of the compensation committee. D) All of the above are important factors of board composition. Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 16 Copyright 2010 Pearson Education, Inc. ! 6) Signed into law on July 30, 2002, the ________ Act requires CEOs of publicly traded companies to vouch for the veracity of the firm's published financial statements. A) Smoot-Hawley B) Humphrey-Hawkins C) McCain-Merrill D) Sarbanes-Oxley Register to View AnswerDiff: 1 Topic: 2.3 Corporate Governance Skill: Recognition 7) The Sarbanes-Oxley Act, passed by the U.S. Congress in July 2002, was designed to A) reinstitute heavy tariffs on international trade. B) reform corporate governance. C) limit the Federal Reserve Board's ability to engage in the buying and selling of gold. D) limit trade with countries deemed lenient on terrorism. Register to View AnswerDiff: 1 Topic: 2.3 Corporate Governance Skill: Recognition T r u e/ F a l se 1) Regarding comparative corporate governance regimes: Bank-based regimes characterized by government influence in bank lending and a lack of transparency is often found in countries such as Korea and Germany. Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition 2) Investor protection is typically better in countries with codified civil law (the Code Napoleon) than in countries with a legal system based in English common law. Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Conceptual 3) The relatively low cost of compliance with the Sarbanes-Oxley Act (SOX) has been a surprising benefit of the act. Register to View AnswerDiff: 1 Topic: 2.3 Corporate Governance Skill: Recognition 17 Copyright 2010 Pearson Education, Inc. ! 4) According to recent research, family-owned firms in some highly-developed economies typically outperform publicly-owned firms. A) True B) False Register to View AnswerDiff: 2 Topic: 2.3 Corporate Governance Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 3 T h e I n t e r n a t ion a l M on e t a r y Syst e m 3.1 History of the International Monetary System M u l t i p l e C hoi c e 1) Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and 4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was A) 4.8665/$. B) 0.2055/$. C) always changing because the price of gold was always changing. D) unknown because there is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 3.1 History of the International Monetary System Skill: Analytical 2) World War I caused the suspension of the gold standard for fixed international exchange rates because the war A) cost too much money. B) interrupted the free movement of gold. C) lasted too long. D) used gold as the main ingredient in armament plating. Register to View AnswerDiff: 1 Topic: 3.1 History of the International Monetary System Skill: Conceptual 3) The post WWII international monetary agreement that was developed in 1944 is known as the ________. A) United Nations. B) League of Nations. C) Yalta Agreement. D) Bretton Woods Agreement. Register to View AnswerDiff: 2 18 Copyright 2010 Pearson Education, Inc. ! Topic: 3.1 History of the International Monetary System Skill: Recognition 4) Another name for the International Bank for Reconstruction and Development is ________. A) the Recon Bank B) the European Monetary System C) the Marshall Plan D) the World Bank Register to View AnswerDiff: 1 Topic: 3.1 History of the International Monetary System Skill: Recognition 5) The International Monetary Fund (IMF) A) in recent years has provided large loans to Russia, South Korea, and Brazil. B) was created as a result of the Bretton Woods Agreement. C) aids countries with balance of payment and exchange rate problems. D) is all of the above. Register to View AnswerDiff: 2 Topic: 3.1 History of the International Monetary System Skill: Recognition 6) Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods? A) Widely divergent national monetary and fiscal policies among member nations. B) Differential rates of inflation across member nations. C) Several unexpected economic shocks to member nations. D) all of the above Register to View AnswerDiff: 2 Topic: 3.1 History of the International Monetary System Skill: Conceptual T r u e/ F a l se 1) Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen. A) True B) False Register to View AnswerDiff: 2 Topic: 3.1 History of the International Monetary System Skill: Recognition 19 Copyright 2010 Pearson Education, Inc. ! 2) Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs). A) True B) False Register to View AnswerDiff: 1 Topic: 3.1 History of the International Monetary System Skill: Recognition 3) Today, the United States has been ejected from the International Monetary Fund for refusal to pay annual dues. A) True B) False Register to View AnswerDiff: 1 Topic: 3.1 History of the International Monetary System Skill: Analytical E ssa y 1) Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914. Today we have several different exchange rate regimes in use, but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand. Today several parties still call for the "good old days" and a return to the gold standard. Develop an argument as to why this is a good idea. Answer: The gold standard forces a nation to maintain sufficient reserves of gold to back its currency's value. This helps control inflation, as a country cannot print additional money without sufficient gold to back it up. The gold standard eases international transactions as there is little uncertainly about exchange rates for trade with foreign countries. Diff: 3 Topic: 3.1 History of the International Monetary System Skill: Analytical 3.2 Contemporary Currency Regimes M u l t i p l e C hoi c e 1) The IMF's exchange rate regime classification identifies ________ as the most rigidly fixed, and ________ as the least fixed. A) exchange arrangements with no separate legal tender; independent floating B) crawling pegs; managed float C) currency board arrangements; independent floating D) pegged exchange rates within horizontal bands; exchange rates within crawling pegs Register to View AnswerDiff: 2 Topic: 3.2 Contemporary Currency Regimes Skill: Recognition 20 Copyright 2010 Pearson Education, Inc. ! 2) Which of the following correctly identifies exchange rate regimes from less fixed to more fixed? A) Independent floating, currency board arrangement, crawling pegs. B) Independent floating, currency board arrangement, managed float. C) Independent floating, crawling pegs, exchange arrangements with no separate legal tender. D) Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs. Register to View AnswerDiff: 2 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual 3) A small economy country whose GDP is heavily dependent on trade with the United States could use a (an) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate. A) pegged exchange rate with the United States B) pegged exchange rate with the Euro C) independent floating D) managed float Register to View AnswerDiff: 2 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual 4) The United States currently uses a ________ exchange rate regime. A) crawling peg B) pegged C) floating D) fixed Register to View AnswerDiff: 1 Topic: 3.2 Contemporary Currency Regimes Skill: Recognition 5) Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? A) Fixed rates provide stability in international prices for the conduct of trade. B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate. C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies. D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses. Register to View AnswerDiff: 2 Topic: 3.2 Contemporary Currency Regimes 21 Copyright 2010 Pearson Education, Inc. ! Skill: Recognition 6) Which of the following is NOT an attribute of the "ideal" currency? A) Monetary independence. B) Full financial integration. C) Exchange rate stability. D) All are attributes of an ideal currency. Register to View AnswerDiff: 1 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual 7) The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve? A) Monetary independence and exchange rate stability. B) Exchange rate stability and full financial integration. C) Full financial integration and monetary independence. D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime. Register to View AnswerDiff: 2 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual T r u e/ F a l se 1) Based on the premise that, other things equal, countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade. A) True B) False Register to View AnswerDiff: 1 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual 2) If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency. A) True B) False Register to View AnswerDiff: 1 Topic: 3.2 Contemporary Currency Regimes Skill: Conceptual E ssa y 22 Copyright 2010 Pearson Education, Inc. ! 1) The mobility of international capital flows is causing emerging market nations to choose between a free-floating currency exchange regime and a currency board (or taken to the limit, dollarization). Describe how each of the regimes would work and identify at least two likely economic results for each regime. Answer: With free float the exchange rate is market determined and beyond the control of the country's central bank or government. The economic results are likely to be an independent monetary policy, free movement of capital, but less stability in the exchange rate. Such instability may be more than an emerging market country's small financial market can bear. A currency board on the other hand is an implied legislative commitment to fix the foreign exchange rate with a specific currency, generally the country's major trading partner. Dollarization is taking this policy to the extreme whereby the emerging market nation forgoes its currency for that of its major trading partner. An example of Dollarization is Panama using U.S. dollars as the official Panamanian currency. With such a regime, independent monetary policy is lost and political influence on monetary policy is eliminated. However, the benefits accruing to countries as a result of the ability to print its own money, seignorage, is lost. Diff: 3 Topic: 3.2 Contemporary Currency Regimes Skill: Analytical 3.3 Emerging Markets and Regime Choices M u l t i p l e C hoi c e 1) Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because A) the Argentine Peso had grown too strong against major trading powers thus the currency board policies were hurting the domestic economy. B) the United States required the action as a prerequisite to finalizing a free trade zone with all of North, South, and Central America. C) the Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar. D) all of the above Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Recognition 2) In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus, the Argentine Peso ________ against the U.S. dollar. A) strengthened B) weakened C) remained neutral D) all of the above Register to View AnswerDiff: 1 23 Copyright 2010 Pearson Education, Inc. ! Topic: 3.3 Emerging Markets and Regime Choices Skill: Analytical 3) In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. dollar. This practice is known as ________. A) bi-currencyism. B) sucrerization. C) a Yankee bailout. D) dollarization. Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Conceptual 4) You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States? A) Dollarization. B) An exchange rate pegged to the U.S. dollar. C) An exchange rate with a fixed price per ounce of gold. D) An internationally floating exchange rate. Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Conceptual 5) Which of the following is NOT an argument against dollarization? A) Dollarization causes a loss of sovereignty over domestic monetary policy. B) Dollarization removes currency volatility against the dollar. C) Dollarization causes the country to lose the power of seignorage. D) The central bank of the dollarized country loses the role of lender of last resort. Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Recognition 6) The ability of a country to profit from its ability to print money is known as ________. A) profiteering B) dollarization C) seignorage D) inflation Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Recognition 24 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) A currency board exists when a country's central bank commits to back its money supply entirely with foreign reserves at all times. Register to View AnswerDiff: 2 Topic: 3.3 Emerging Markets and Regime Choices Skill: Recognition 2) Dollarization is a common solution for countries suffering from currency revaluation. Register to View AnswerDiff: 1 Topic: 3.3 Emerging Markets and Regime Choices Skill: Recognition 3.4 The Birth of a European Currency: The Euro M u l t i p l e C hoi c e 1) Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)? A) National birthrates must be at 2.0 or lower per person. B) The fiscal deficit should be no more than 3% of GDP. C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year. D) Government debt should be no more than 60% of GDP. Register to View AnswerDiff: 2 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Recognition 2) According to the authors, what is the single most important mandate of the European Central Bank? A) Promote international trade for countries within the European Union. B) Price, in euros, all products for sale in the European Union. C) Promote price stability within the European Union. D) Establish an EMU trade surplus with the United States. Register to View AnswerDiff: 2 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Conceptual 3) Which of the following is a way in which the euro affects markets? A) Countries within the Euro zone enjoy cheaper transaction costs. B) Currency risks and costs related to exchange rate uncertainty are reduced. C) Consumers and business enjoy price transparency and increased price-based competition. D) all of the above 25 Copyright 2010 Pearson Education, Inc. ! Register to View AnswerDiff: 1 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Conceptual 4) For the three years from early 2002 to early 2005, the euro maintained a strong and steady rise in value against the U.S. dollar (USD). Which of the following were NOT a contributing factor in the assent of the euro and the decline in the dollar? A) Severe U.S. balance of payments deficits. B) A general weakening of the dollar after the attacks of September 11, 2001. C) Large U.S. balance of payment surpluses. D) All of the above were contributing factors. Register to View AnswerDiff: 2 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Conceptual T r u e/ F a l se 1) The Euro currency is fixed against other currencies on the international currency exchange markets, but allows member country currencies to float against each other. A) True B) False Register to View AnswerDiff: 1 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Recognition 2) The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as their currency. Register to View AnswerDiff: 2 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Recognition 3) In the decade since 2000, the U.S. has experienced its largest bilateral trade deficits with the countries of China and Japan. Register to View AnswerDiff: 2 Topic: 3.4 The Birth of a European Currency: The Euro Skill: Recognition 26 Copyright 2010 Pearson Education, Inc. ! 3.5 Exchange Rate Regimes: What Lies Ahead? M u l t i p l e C hoi c e 1) Of the following, which is NOT a trade-off that must be dealt with in any exchange rate regime? A) Cooperation vs independence. B) Rules vs discretionary action. C) Dollars vs pounds. D) All of the above are rate regime trade-offs. Register to View AnswerDiff: 1 Topic: 3.5 Exchange Rate Regimes: What Lies Ahead? Skill: Recognition T r u e/ F a l se 1) All exchange rate regimes must deal with the trade-off between rules and discretion as well as between cooperation and independence. Register to View AnswerDiff: 2 Topic: 3.5 Exchange Rate Regimes: What Lies Ahead? Skill: Recognition 2) Regime structures like the gold standard required no cooperative policies among countries, only the assurance that all would abide by the "rules of the game." Register to View AnswerDiff: 1 Topic: 3.5 Exchange Rate Regimes: What Lies Ahead? Skill: Recognition 3) Bretton Woods required less in the way of cooperation among countries than did the gold standard. Register to View AnswerDiff: 1 Topic: 3.5 Exchange Rate Regimes: What Lies Ahead? Skill: Conceptual 27 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 4 T h e B a l a n c e of P a y me n ts 4.1 Typical Balance of Payments Transactions M u l t i p l e C hoi c e 1) Which of the following is NOT a major subaccount of the Balance of Payments? A) The financial account. B) The accounts payable. C) The capital account. D) The current account. Register to View AnswerDiff: 2 Topic: 4.1 Typical Balance of Payments Transactions Skill: Recognition T r u e/ F a l se 1) When the world went to a system of floating exchange rates, the Balance of Payments became a relic of a system of fixed exchange rates and is no longer watched by serious economic groups. Register to View AnswerDiff: 2 Topic: 4.1 Typical Balance of Payments Transactions Skill: Conceptual 4.2 Fundamentals of Balance of Payments Accounting M u l t i p l e C hoi c e 1) The ba l anc e of pa yments as applied to a course in international finance may be defined as: A) the amount still owed by an exporting firm after making an initial down payment. B) the amount still owed by governments to the International Monetary Fund. C) the measurement of all international economic transactions between the residents of a country and foreign residents. D) the amount of a country's merchandise trade deficit or surplus. Register to View AnswerDiff: 2 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Conceptual 28 Copyright 2010 Pearson Education, Inc. ! 2) Balance of payment (BOP) data may be important for any of the following reasons: A) BOP data helps to forecast a country's market potential, especially in the short run. B) The BOP is an important indicator of a country's foreign exchange rate. C) Changes in a country's BOP may signal a change in controls over payment of dividends and interest. D) all of the above Register to View AnswerDiff: 2 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Conceptual 3) A country experiencing a serious BOP ________ is more likely to ________ exports than otherwise. A) surplus; contract B) surplus; expand C) deficit; expand D) none of the above Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Analytical 4) Which of the following would NOT be considered a typical BOP transaction? A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent company. B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich. C) A U.S. tourist purchases gifts at a museum in London. D) All are example of BOP transactions. Register to View AnswerDiff: 2 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Conceptual 5) Which of the following is NOT a part of the C ur r ent A c count of BOP? A) Net export/import of goods. B) Balance of Trade. C) Net portfolio investment. D) Net export/import of services. Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition 29 Copyright 2010 Pearson Education, Inc. ! 6) Which of the following is NOT part of the F ina nc i a l A c count of the BOP? A) Net foreign direct investment. B) Net import/export of services. C) Net portfolio investment. D) Other Financial items. Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition 7) Which of the following is NOT an item to be considered in BOP calculations? A) Purchase of a U.S. Treasury Bill by a foreign resident. B) A U.S.-based firm manages the development of an oil field in Kazakhstan. C) A consumer buys a VCR made in Korea from a Florida Wal-Mart store. D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case of LaBatt's Canadian beer. Register to View AnswerDiff: 2 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Conceptual 8) The ba l anc e of pa yments A) determines the eligibility of countries for IMF aid. B) adds up the value of all assets and liabilities of a country on a specific date. C) records all international transactions for a country over a period of time. D) all of the above Register to View AnswerDiff: 2 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition T r u e/ F a l se 1) The authors identify a tip for understanding BOP accounting. They recommend that you "follow the cash flow." A) True B) False Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition 30 Copyright 2010 Pearson Education, Inc. ! 2) The BOP must be in balance but the current account need not be. A) True B) False Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition 3) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored into BOP calculations. A) True B) False Register to View AnswerDiff: 1 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Recognition E ssa y 1) What is a country's balance of (merchandise) trade and why is it so widely reported in the financial and popular press? Answer: The balance of trade (BOT) is the largest and most important subset of a country's current account. It measures the difference in a country's imports and exports over a specified time period. It is often reported because it is intuitively easy to understand (i.e., we either sell more or buy more from foreign countries) and it is a reasonable representation of the total current account balance. (For example, for the U.S. the BOT was -$343B in 1999 while the current account balance was -$331B. Diff: 3 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Analytical 2) What is the Official Reserves Account (ORA) and why is it more important for countries under a fixed exchange rate regime than for ones under a floating exchange rate regime? Answer: The ORA is the total reserves held by official monetary authorities within the country. Under a fixed exchange regime a country's currency is convertible into a fixed amount of another country's currency. To keep the relationship between currencies at equilibrium, it may become necessary for the government to buy or sell official reserves until the equilibrium is restored. Under a variable rate regime this is not necessary as exchange rates are allowed to change and official reserves no longer serve the same purpose as under the fixed rate regime. Diff: 3 Topic: 4.2 Fundamentals of Balance of Payments Accounting Skill: Analytical 31 Copyright 2010 Pearson Education, Inc. ! 4.3 The Accounts of the Balance of Payments M u l t i p l e C hoi c e 1) Which of the following is NOT part of the ba l a nc e of payments account? A) The current account. B) The financial/capital account. C) The official reserves account. D) All of the above are BOP accounts. Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 2) The ________ includes all international economic transactions with income or payment flows occurring within the year. A) capital account B) current account C) financial account D) IMF account Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 3) If your company were to import and export textiles, the transactions would be recorded in the current account subcategory of ________. A) services trade B) income trade C) goods trade D) current transfers Register to View AnswerDiff: 2 Topic: 4.3 The Accounts of the Balance of Payments Skill: Conceptual 4) The travel services provided to international travelers by United Airlines would be recorded in the current account subcategory of ________. A) services trade B) income trade C) goods trade D) current transfers Register to View AnswerDiff: 2 Topic: 4.3 The Accounts of the Balance of Payments Skill: Conceptual 32 Copyright 2010 Pearson Education, Inc. ! 5) Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of ________. A) services trade B) income trade C) goods trade D) current transfers Register to View AnswerDiff: 2 Topic: 4.3 The Accounts of the Balance of Payments Skill: Conceptual 6) The subcategory that typically dominates the current account is ________. A) goods (merchandise) trade B) services trade C) income trade D) transfer accounts Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 7) In 2007 the United States posted a current account deficit of -$731 billion. The bulk of the negative value came from A) a net transfer deficit. B) an income balance deficit. C) a goods trade deficit. D) an income trade deficit. Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 8) Over the last two decades the surplus on U.S. services trade has typically been ________ the deficit on U.S. goods trade. A) greater than B) equal to C) less than D) The relationship is constantly shifting from greater than to less than. Register to View AnswerDiff: 2 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 33 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Because current and financial/capital account balances use double-entry bookkeeping it is unusual to find serious discrepancies in the debits and credits. A) True B) False Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Recognition 2) In general, as a country's income increases, so does the demand for imports. A) True B) False Register to View AnswerDiff: 1 Topic: 4.3 The Accounts of the Balance of Payments Skill: Conceptual 4.4 The Capital and Financial Accounts M u l t i p l e C hoi c e 1) The ________ of the balance of payments measures all international economic transactions of financial assets. A) current account B) merchandise trade account C) services account D) capital/financial account Register to View AnswerDiff: 1 Topic: 4.4 The Capital and Financial Accounts Skill: Recognition 2) The financial account consists COMPLETELY of which three components? A) Stock investment, bond investment, and mutual fund investment. B) Direct investment, stock investment, and bond investment. C) Direct investment, portfolio investment, and other asset investment. D) Mutual fund investment, portfolio investment, and stock investment. Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Recognition 34 Copyright 2010 Pearson Education, Inc. ! 3) When categorizing investments for the financial account component of the balance of payments the ________ is an investment where the investor has no control whereas the ________ is an investment where the investor has control over the asset. A) direct investment; portfolio investment B) direct investment; indirect investment C) portfolio investment; indirect investment D) portfolio investment; direct investment Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Recognition 4) In general there is consensus that ________ should be free but there is no such consensus that ________ should be free. A) international investment; international goods trade B) international investment; international trade C) international trade; international goods trade D) international trade; international investment Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Conceptual 5) The two major concerns about foreign direct investment are: A) national defense and taxes. B) who controls the assets and who receives the profits. C) who receives the profits and taxes. D) who pays the taxes and who receives the taxes. Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Conceptual 6) Portfolio investment is capital invested in activities that are ________ rather than made for ________. A) short term; the long term B) long term; profit C) profit motivated; control D) control motivated; profit Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Recognition 35 Copyright 2010 Pearson Education, Inc. ! 7) Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency. A) deficit, revaluing; surplus, revaluing B) deficit, devaluing; surplus, devaluing C) surplus, devaluing; deficit, revaluing D) surplus, revaluing; deficit, devaluing Register to View AnswerDiff: 2 Topic: 4.4 The Capital and Financial Accounts Skill: Conceptual T r u e/ F a l se 1) International debt security purchases and sales are defined as portfolio investments for financial account purposes because by definition debt securities do not provide the buyer with ownership or control. A) True B) False Register to View AnswerDiff: 1 Topic: 4.4 The Capital and Financial Accounts Skill: Recognition 2) Significant amounts of United States Treasury issues are purchased by foreign investors, therefore the U.S. must earn foreign currency to repay this debt. A) True B) False Register to View AnswerDiff: 1 Topic: 4.4 The Capital and Financial Accounts Skill: Conceptual 36 Copyright 2010 Pearson Education, Inc. ! 4.5 The Balance of Payments in Total M u l t i p l e C hoi c e 1) The largest single component of the United States current account is ________. A) current transfers B) income payments and receipts C) goods (merchandise) imports and exports D) services imports and exports Register to View AnswerDiff: 1 Topic: 4.5 The Balance of Payments in Total Skill: Recognition 2) Which of the following statements about the balance of payments is NOT true? A) The BOP is the summary statement of all international transactions between one country and all other countries. B) The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year. C) Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 4.5 The Balance of Payments in Total Skill: Recognition T r u e/ F a l se 1) An excess of merchandise exports over merchandise imports results in a balance of trade deficit. A) True B) False Register to View AnswerDiff: 1 Topic: 4.5 The Balance of Payments in Total Skill: Conceptual 2) The BOP should always balance. A) True B) False Register to View AnswerDiff: 1 Topic: 4.5 The Balance of Payments in Total Skill: Recognition 37 Copyright 2010 Pearson Education, Inc. ! 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables M u l t i p l e C hoi c e 1) Use the following terms for this question: C = consumption I = capital investment spending G = government spending X = exports of goods and services M = imports of goods and services BOP = balance of payments GDP = gross domestic product NPV = net present value INF = inflation R = real rate of return The static equation for the nations GDP is: A) GDP = C + I + G + (X + M ) x INF B) GDP = C + I + G + X + M C) GDP = C + I + G + X - M D) GDP = C + I + X - M + R Register to View AnswerDiff: 2 Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables Skill: Analytical 2) Imports have the potential to lower a country's inflation rate because of each of the following EXCEPT: A) the import of lower priced goods limits what domestic competitors can charge for goods. B) the import of lower priced services limits what domestic competitors can charge for services. C) the higher prices of foreign goods spurs domestic competitors to cut prices. D) of all of the above Register to View AnswerDiff: 2 Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables Skill: Recognition T r u e/ F a l se 1) An increase in GDP should lead to a decrease in imports. Register to View AnswerDiff: 1 Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables Skill: Recognition 38 Copyright 2010 Pearson Education, Inc. ! 2) The effect of an imbalance in the BOP is the same for countries on a fixed exchange rate regime as for those on a floating exchange rate regime. Register to View AnswerDiff: 1 Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables Skill: Recognition 3) Under a floating exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. Register to View AnswerDiff: 1 Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables Skill: Recognition 4.7 Trade Balances and Exchange Rates M u l t i p l e C hoi c e 1) Of the following, which is NOT a part of J-Curve adjustment path? A) The currency contract period. B) The exchange rate pass-through period. C) The quantity adjustment period. D) Each of the above is part of the J-Curve adjustment path. Register to View AnswerDiff: 1 Topic: 4.7 Trade Balances and Exchange Rates Skill: Recognition 2) Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curve adjustment path ? A) Imports become relatively more expensive. B) Exports become relatively less expensive. C) The balance of trade gets worse. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 4.7 Trade Balances and Exchange Rates Skill: Conceptual T r u e/ F a l se 1) When a currency is devalued the immediate impact may be an increase in a country's trade deficit. However, this situation tend to correct itself in 2 to 5 weeks.. Register to View AnswerDiff: 2 Topic: 4.7 Trade Balances and Exchange Rates Skill: Conceptual 39 Copyright 2010 Pearson Education, Inc. ! 4.8 Capital Mobility M u l t i p l e C hoi c e 1) The authors identify four distinct periods of capital mobility since 1860. Which do they term as a "period of global economic destruction"? A) 1860 - 1914 B) 1914 - 1945 C) 1945 - 1971 D) 1971 - 2007 Register to View AnswerDiff: 1 Topic: 4.8 Capital Mobility Skill: Recognition 2) ________ is the cross-border purchase of assets that are then managed in a way that hides the movement of money and its ownership. A) Capital flight B) Capital mobility C) Irrational exuberance D) Money laundering Register to View AnswerDiff: 1 Topic: 4.8 Capital Mobility Skill: Recognition T r u e/ F a l se 1) The Bretton Woods era realized a great expansion of international trade in goods and services. Register to View AnswerDiff: 2 Topic: 4.8 Capital Mobility Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 5 C u r r e n t M u l t i n a t ion a l F i n a n c i a l C h a l l e n ges : T h e C r e d i t C r isi s of 2007-2009 5.1 The Seeds of Crisis: Sub-Prime Debt M u l t i p l e C hoi c e 1) Investment banks and stock brokerages have traditionally been regulated by the A) Federal Reserve System (FED). B) Federal Deposit Insurance Corporation (FDIC). C) Securities and Exchange Commission (SEC). D) Internal Revenue Service (IRS). Register to View Answer40 Copyright 2010 Pearson Education, Inc. ! Diff: 2 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition 2) The Glass-Steagall Act of 1933 A) separated commercial banking activities from investment banking activities. B) created the Federal Reserve System. C) developed the system of commercial bank deposit insurance. D) all of the above Register to View AnswerDiff: 2 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition 3) Which of the following is NOT another term for a prime mortgage loan? A) Conventional loan. B) Top-qual loan. C) Conforming loan. D) All of the above are suitable terms for a prime mortgage loan. Register to View AnswerDiff: 1 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition T r u e/ F a l se 1) Mortgage loans in the U.S. are classified by risk into one of three types: prime, alt-A, and subprime. Register to View AnswerDiff: 1 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition 41 Copyright 2010 Pearson Education, Inc. ! 2) Alt-A mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie Mac. Register to View AnswerDiff: 2 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition 3) The Financial Services Modernization Act of 1999 explicitly allowed corporate combinations of commercial banks with other types of financial institutions such as insurance companies and investment banking firms. Register to View AnswerDiff: 1 Topic: 5.1 The Seeds of Crisis: Sub-Prime Debt Skill: Recognition 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt M u l t i p l e C hoi c e 1) The process of turning an illiquid asset into a liquid saleable asset is called ________. A) swapping B) wrapping C) securitization D) creationism Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 2) Asset-backed securities (ASBs) may be securitized based on ________. A) auto loans B) home-equity loans C) credit card receivables D) all of the above Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 42 Copyright 2010 Pearson Education, Inc. ! 3) A ________ is a financial intermediation device that allowed the participant to borrow short and lend long. A) sub-prime loan B) structured investment vehicle C) non-conforming loan D) all of the above Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 4) A ________ is a securitized financial instrument that is sold to the market in tranches representing different levels of default risk. A) guaranteed security asset (GSA) B) mortgaged backed security (MBS) C) credit default swap (CDS) D) collateralized debt obligation (CDO) Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 5) Which of the following statements concerning credit default swaps is FALSE? A) As of year-end 2008, CDSs are completely outside of regulatory boundaries. B) A CDS is a derivative security that may be used for hedging risk or for speculative purposes. C) In order be a party to a CDO, at least one of either the buyer or seller must own the underlying asset. D) CDSs allow banks to severe their links to their borrowers, thereby reducing their incentive to screen and monitor the ability of borrowers to repay. Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 6) ________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk. A) Subordination B) Credit enhancement C) Derivation D) Deregulation Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 43 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) From 1990 through 2007, the amount of securitized loans outstanding dropped from over $25 trillion to less than $5 trillion and was a key element in the loss of market liquidity. Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Conceptual 2) It is pretty clear after reading this chapter that securitization in and of itself is a poor financial idea. Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Conceptual 3) Securitization may degrade credit quality because the process severs the link of lending and repayment (risk and reward) between the originator of the loan and the borrower. Register to View AnswerDiff: 1 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Conceptual 4) The authors make it clear that the main source of market failure with collateralized debt obligations lay almost exclusively with the rating agencies. Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Conceptual 5) Credit Default Swaps are highly regulated financial instruments as a result of the Commodity Futures Modernization Act of 2000. Register to View AnswerDiff: 2 Topic: 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt Skill: Recognition 44 Copyright 2010 Pearson Education, Inc. ! 5.3 The Fallout: The Crisis of 2007 and 2008 M u l t i p l e C hoi c e 1) Which of the following is NOT identified by the authors as a "safe-haven" currency? A) The euro. B) The British pound. C) The U.S. dollar. D) The Japanese yen. Register to View AnswerDiff: 2 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 2) The accounting procedure whereby assets are revalued to market value basis on a daily basis is known as ________. A) FASB rule 62 B) market value accounting C) marked-to-market D) none of the above Register to View AnswerDiff: 1 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 3) The typical TED spread, the difference between the LIBOR and the interest rate swap index, is typically about ________ basis points. A) 350 B) 180 C) 120 D) 80 Register to View AnswerDiff: 2 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition T r u e/ F a l se 1) Bear-Stearns is the largest single bankruptcy in U.S. history. Register to View AnswerDiff: 1 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 45 Copyright 2010 Pearson Education, Inc. ! 2) The international credit crisis began in full force in September 2008. Register to View AnswerDiff: 1 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 3) Near the end of the U.S. housing boom many of the mortgages classified as Alt-A were in fact sub-prime. Register to View AnswerDiff: 1 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 4) LIBOR stand for the London Interbank Offered Rate. Register to View AnswerDiff: 1 Topic: 5.3 The Fallout: The Crisis of 2007 and 2008 Skill: Recognition 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism M u l t i p l e C hoi c e 1) Portfolio theory relies on combining assets with ________ return correlation exclusively to reduce risk. A) highly positive B) low C) zero D) none of the above Register to View AnswerDiff: 2 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Recognition 2) Future financial market regulation must include all of the following EXCEPT: A) renewed regulatory requirements. B) increased reporting. C) greater transparency in pricing and valuation. D) Regulation must include all of the above. Register to View AnswerDiff: 2 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Recognition 46 Copyright 2010 Pearson Education, Inc. ! 3) In finance, a liquid asset: A) sells quickly. B) sells at or near its market value. C) both A and B D) none of the above Register to View AnswerDiff: 2 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Conceptual T r u e/ F a l se 1) The authors conclude the chapter with a specific road map for future financial regulation. Register to View AnswerDiff: 1 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Conceptual 2) Baring the (hopefully temporary setback of 2008) capital is more mobile today than ever before. Register to View AnswerDiff: 1 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Recognition 3) Securitization is likely to be declared illegal in the U.S. though it may still exist elsewhere in the world. Register to View AnswerDiff: 1 Topic: 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism Skill: Conceptual M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 6 T h e F o r e i g n E x c h a n ge M a r k e t 6.1 Geographical Extent of the Foreign Exchange Market M u l t i p l e C hoi c e 1) Which of the following is NOT true regarding the market for foreign exchange? A) The market provides the physical and institutional structure through which the money of one country is exchanged for another. B) The rate of exchange is determined in the market. C) Foreign exchange transactions are physically completed in the foreign exchange market. D) All of the above are true. Register to View AnswerDiff: 1 47 Copyright 2010 Pearson Education, Inc. ! Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Recognition 2) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency. A) Eurodollar transaction B) import/export exchange C) foreign exchange transaction D) interbank market transaction Register to View AnswerDiff: 1 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Recognition 3) While trading in foreign exchange takes place worldwide, the major currency trading centers are located in A) London, New York, and Tokyo. B) New York, Zurich, and Bahrain. C) Paris, Frankfurt, and London. D) Los Angeles, New York, and London. Register to View AnswerDiff: 2 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Recognition 4) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market? A) The transfer of purchasing power between countries. B) Obtaining or providing credit for international trade transactions. C) Minimizing the risks of exchange rate changes. D) All of the above were identified as functions of the foreign exchange market. Register to View AnswerDiff: 2 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Recognition T r u e/ F a l se 1) Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day. Register to View AnswerDiff: 1 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Recognition E ssa y 48 Copyright 2010 Pearson Education, Inc. ! 1) What are some of the reasons central banks and treasuries enter the foreign exchange markets, and in what important ways are they different from other foreign exchange participants? Answer: Central banks and treasuries enter the foreign exchange market to acquire/spend their own foreign exchange reserves and to influence the price at which their own currency is traded. Unlike other market participants, they are not profit oriented. Instead, they may willingly take a loss if they think it is in their best national interest. Diff: 3 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Conceptual 2) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used. Answer: Spot transactions are exchanging one currency for another right now. Spot transactions are typically entered into because the parties need to exchange foreign currencies that they have received into their domestic currency, or because they have an obligation that requires them to obtain foreign currency. Forward foreign exchange transactions are agreements entered into today to exchange currencies at a particular price at some point in the future. Forwards may be speculative or a hedge against unexpected changes in the price of the other currency. Swaps are the simultaneous purchase and sale of a given amount of a foreign exchange for two different dates. Both transactions are conducted with the same counterparty. A swap may be considered a technique for borrowing another currency on a fully collateralized basis. Diff: 3 Topic: 6.1 Geographical Extent of the Foreign Exchange Market Skill: Analytical 6.2 Functions of the Foreign Exchange Market M u l t i p l e C hoi c e 1) The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. A) futures market B) federal open market C) foreign exchange market D) LIBOR Register to View AnswerDiff: 1 Topic: 6.2 Functions of the Foreign Exchange Market Skill: Recognition T r u e/ F a l se 1) Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at Bretton Woods. Register to View Answer49 Copyright 2010 Pearson Education, Inc. ! Diff: 1 Topic: 6.2 Functions of the Foreign Exchange Market Skill: Conceptual 6.3 Market Participants M u l t i p l e C hoi c e 1) The authors identify two tiers of foreign exchange markets: A) bank and nonbank foreign exchange. B) commercial and investment transactions. C) interbank and client markets. D) client and retail market. Register to View AnswerDiff: 2 Topic: 6.3 Market Participants Skill: Recognition 2) It is characteristic of foreign exchange dealers to A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale. B) act as market makers, willing to buy and sell the currencies in which they specialize. C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange. D) All of the above are characteristics of foreign exchange dealers. Register to View AnswerDiff: 2 Topic: 6.3 Market Participants Skill: Recognition 3) Which of the following may be participants in the foreign exchange markets? A) Bank and nonbank foreign exchange dealers. B) Central banks and treasuries. C) Speculators and arbitragers. D) All of the above. Register to View AnswerDiff: 1 Topic: 6.3 Market Participants Skill: Recognition 4) ________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction. A) Speculators and arbitragers B) Foreign exchange brokers C) Central banks D) Treasuries 50 Copyright 2010 Pearson Education, Inc. ! Register to View AnswerDiff: 1 Topic: 6.3 Market Participants Skill: Recognition 5) In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets. A) wholesalers; retailers B) central banks; treasuries C) speculators; arbitragers D) dealers; brokers Register to View AnswerDiff: 2 Topic: 6.3 Market Participants Skill: Recognition 6) Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. A) central banks; treasuries B) dealers; brokers C) brokers; dealers D) speculators; arbitragers Register to View AnswerDiff: 2 Topic: 6.3 Market Participants Skill: Recognition T r u e/ F a l se 1) Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize. Register to View AnswerDiff: 1 Topic: 6.3 Market Participants Skill: Recognition 2) Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers. Register to View AnswerDiff: 2 Topic: 6.3 Market Participants Skill: Recognition 3) The primary motive of foreign exchange activities by most central banks is profit. Register to View AnswerDiff: 2 51 Copyright 2010 Pearson Education, Inc. ! Topic: 6.3 Market Participants Skill: Recognition 6.4 Transactions in the Interbank Market M u l t i p l e C hoi c e 1) Daily trading volume in the foreign exchange market was about ________ per ________ in 2007. A) $3,200 billion; month B) $1,000 billion; month C) $3,200 billion; day D) $1,000 billion; day Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 2) ________ are NOT one of the three categories reported for foreign exchange. A) Spot transactions B) Swap transactions C) Strip transactions D) Futures transactions Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 3) The greatest amount of foreign exchange trading takes place in the following three cities: A) New York, London, and Tokyo. B) New York, Singapore, and Zurich. C) London, Frankfurt, and Paris. D) London, Tokyo, and Zurich. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 4) The four currencies that constitute about 80% of all foreign exchange trading are A) U.K pound, Chinese yuan, euro, and Japanese yen. B) U.S. dollar, euro, Chinese yuan, and U.K. pound. C) U.S. dollar, Japanese yen, euro, and U.K. pound. D) U.S. dollar, U.K. pound, yen, and Chinese yuan. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 52 Copyright 2010 Pearson Education, Inc. ! 5) A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange. A) spot B) forward C) futures D) none of the above Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 6) A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date. A) spot B) forward C) swap D) currency Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 7) A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________. A) buying dollars forward; buying pounds forward. B) selling pounds forward; selling dollars forward. C) selling pounds forward; buying dollars forward. D) selling dollars forward; buying pounds forward. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 8) A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market. A) "forward against spot" B) "forspot" C) "repurchase agreement" D) "spot against forward" Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 53 Copyright 2010 Pearson Education, Inc. ! 9) The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered. A) nondeliverable forward B) dollar only forward C) virtual forward D) internet forward Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 10) Which of the following is NOT true regarding nondeliverable forward (NDF) contracts? A) NDFs are used primarily for emerging market currencies. B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for dollar settlement. C) NDFs can only be traded by central banks. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Conceptual T r u e/ F a l se 1) A spot transaction in the interbank market for foreign exchange would typically involve a two-day delay in the actual delivery of the currencies, while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait. Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 2) Swap and forward transactions account for an insignificant portion of the foreign exchange market. Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 3) Nondeliverable Forwards were originally envisioned as a method of currency speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 54 Copyright 2010 Pearson Education, Inc. ! 4) In general, NDF markets normally develop for country currencies having large cross-border capital movements, but still subject to convertibility restrictions. Register to View AnswerDiff: 1 Topic: 6.4 Transactions in the Interbank Market Skill: Conceptual 5) NDFs are traded and settled inside the country of the subject currency, and therefore are within the control of the country's government. Register to View AnswerDiff: 2 Topic: 6.4 Transactions in the Interbank Market Skill: Recognition 6.5 Foreign Exchange Rates and Quotations M u l t i p l e C hoi c e 1) A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate. A) quote; rate B) quote; quote C) rate; quote D) rate; rate Register to View AnswerDiff: 1 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 2) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit. A) European terms; indirect B) American terms; direct C) American terms; European terms D) European terms; American terms Register to View AnswerDiff: 1 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 55 Copyright 2010 Pearson Education, Inc. ! 3) The following is an example of an American term foreign exchange quote: A) $20/. B) !0.85/$. C) 100/!. D) None of the above. Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 4) American and British meanings differ for the word billion. Therefore, when traders refer to an American billion, they call it a/an ________. A) Kiwi B) Loony C) Uncle Sam D) Yard Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 5) From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market? A) SF2.40/ B) $1.50/ C) 0.55/! D) $0.90/! Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 6) A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit. A) direct; direct B) direct; indirect C) indirect; indirect D) indirect; direct Register to View AnswerDiff: 1 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 56 Copyright 2010 Pearson Education, Inc. ! 7) If the direct quote for a U.S. investor for British pounds is $1.43/, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________. A) 0.699/$; 0.699/$ B) $0.699/; 0.699/$ C) 1.43/; 0.699/$ D) 0.699/$; $1.43/ Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 8) ________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency. A) Dealers; ask; bid B) Dealers; bid; ask C) Brokers; ask; bid D) Brokers; bid; ask Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition T A B L E 6.1 U se t h e t a b l e to a n sw e r f ol l ow i n g q u est ion (s). 9) Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________. A) 1.4484/$; $0.6904/ B) $1.4481/; 0.6906/$ C) $1.4484/; 0.6904/$ D) 1.4487/$; $0.6903/ Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 57 Copyright 2010 Pearson Education, Inc. ! 10) Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________. A) -20 B) -18 C) 129.74/$ D) 129.62/$ Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 11) Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________. A) $1.4250/ B) $1.4257/ C) -$230 D) -$238 Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 12) Refer to Table 6.1. According to the information provided in the table, the 6-month yen is selling at a forward ________ of approximately ________ per annum. (Use the mid rates to make your calculations.) A) discount; 2.09% B) discount; 2.06% C) premium; 2.09% D) premium; 2.06% Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 13) Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? 129.87/$ !1.1226/$ !0.00864/ A) 115.69/! B) 114.96/! C) $0.8908/! D) $0.0077/ Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical 58 Copyright 2010 Pearson Education, Inc. ! 14) The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.08709/!. Thus, the dollar has ________ by ________. A) appreciated; 2.30% B) depreciated; 2.30% C) appreciated; 2.24% D) depreciated; 2.24% Register to View AnswerDiff: 3 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Analytical T r u e/ F a l se 1) The European and American terms for foreign currency exchange are square roots of one another. Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 2) When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists. Register to View AnswerDiff: 2 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition 3) Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face. Register to View AnswerDiff: 1 Topic: 6.5 Foreign Exchange Rates and Quotations Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 7 I n t e r n a t ion a l P a r i t y C on d i t ions 7.1 Prices and Exchange Rates M u l t i p l e C hoi c e 1) If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as A) relative purchasing power parity. B) interest rate parity. C) the law of one price. 59 Copyright 2010 Pearson Education, Inc. ! D) equilibrium. Register to View AnswerDiff: 1 Topic: 7.1 Prices and Exchange Rates Skill: Recognition 2) T he E conomist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index? A) $0.0086/ B) 124/$ C) $0.0081/ D) 115.75/$ Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 3) If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________. A) correctly priced B) under priced C) over priced D) not enough information to determine if the price is appropriate or not Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 60 Copyright 2010 Pearson Education, Inc. ! 4) The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar? A) Peso 8.50/$1 B) Peso 10.8/$1 C) Peso 11.76/$1 D) None of the above Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 5) The implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. The current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is ________. A) overvalued B) undervalued C) correctly valued D) not enough information to answer this question Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 6) According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________. A) overvalued; approximately 21% B) overvalued; approximately 27% C) undervalued; approximately 21% D) undervalued; approximately 27% Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 7) Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.98/, the Honda Accord should cost ________ in Great Britain. A) 21,375 B) 18,365 C) 10,795 D) 42,322 Register to View AnswerDiff: 1 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 61 Copyright 2010 Pearson Education, Inc. ! 8) One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately ________. A) $0.96/C$ B) $1/C$1 C) $1.04/C$1 D) relative PPP provides no guide for this type of question Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 9) ________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate. A) The Fisher Effect B) The International Fisher Effect C) Absolute Purchasing Power Parity D) Relative Purchasing Power Parity Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Recognition 10) Two general conclusions can be made from the empirical tests of purchasing power parity (PPP): A) PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively low rates of inflation. B) PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively high rates of inflation. C) PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively low rates of inflation. D) PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively high rates of inflation. Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Recognition 62 Copyright 2010 Pearson Education, Inc. ! 11) A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP. A) overvalued B) over compensating C) undervalued D) under compensating Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Conceptual 12) If we set the r e a l e f f e c t i ve exchange r a t e ind ex between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112..6, then from a competitive perspective the U.S. dollar is A) overvalued. B) undervalued. C) very competitive. D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 13) If we set the r e a l e f f e c t i ve exchange r a t e ind ex between the United Kingdom and the United States equal to 100 in 2005, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is ________. A) overvalued B) undervalued C) equally valued D) There is not enough information to answer this question. Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Conceptual 63 Copyright 2010 Pearson Education, Inc. ! 14) The government just released international exchange rate statistics and reported that the r e a l e f f e c t ive exchange r a t e i ndex for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news. A) importers; exporters B) importers; importers C) exporters; exporters D) exporters; importers Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Conceptual 15) E xchange r a t e pass-through may be defined as A) the bid/ask spread on currency exchange rate transactions. B) the degree to which the prices of imported and exported goods change as a result of exchange rate changes. C) the PPP of lesser-developed countries. D) the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime. Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Recognition 16) Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players? A) 92% B) 33.3% C) 41.7% D) 4.1% Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 64 Copyright 2010 Pearson Education, Inc. ! 17) Jaguar has full manufacturing costs of their S-type sedan of 22,803. They sell the S-type in the UK with a 20% margin for a price of 27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate? A) 22,803 B) 25,581 C) 27,363 D) 55,000 Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 18) Jaguar has full manufacturing costs of their S-type sedan of 22,803. They sell the S-type in the UK with a 20% margin for a price of 27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate? A) 20.0% B) 15.3% C) 12.4% D) 7.2% Register to View AnswerDiff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 19) The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one. If the Japanese yen appreciates against the U.S. dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%, then other things equal, the total dollar sales revenues of Sony DVDs would ________. A) decline B) increase C) stay the same D) insufficient information Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 65 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) If a market basket of goods cost $100 is the US and !70 in France, then the PPP exchange rate "#$%&'()'*+,-.!+ Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 2) The assumptions for relative PPP are more rigid than the assumptions for absolute PPP. Register to View AnswerDiff: 1 Topic: 7.1 Prices and Exchange Rates Skill: Conceptual 3) Empirical tests prove that PPP is an accurate predictor of future exchange rates. Register to View AnswerDiff: 1 Topic: 7.1 Prices and Exchange Rates Skill: Recognition 4) Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively e l ast i c demand. Register to View AnswerDiff: 2 Topic: 7.1 Prices and Exchange Rates Skill: Conceptual E ssa y 1) The authors describe an application of uncovered interest arbitrage (UIA) known as "yen carry trade." Define UIA and describe the example of yen carry trade. Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy? Answer: UIA is the practice of investors borrowing money in countries where interest rates are relatively low, converting the loan proceeds into a currency where rates are relatively high, investing at the higher rate, subsequently converting the proceeds back into the original currency to repay the proceeds from the loan and hopefully realizing a greater return from this practice than if the borrowing and investing had all taken place in the original currency. The arbitrage is uncovered because at the time of the investment the investor does not lock in a forward exchange rate and therefore bears the risk that currency exchange rates will change in an unfavorable manner. The yen carry trade exists because rates in Japan are so very low that investors borrow yen, convert to another currency, say U.S. dollars, invest at much higher interest rates, often in default-risk free Treasury securities, then convert back to yen, repay the original loan and walk away with a significantly greater return than otherwise available. The risk in this process is neither from the investment nor from the loan. The risk is that exchange rates may change unfavorably and the investor takes a loss rather than a profit. 66 Copyright 2010 Pearson Education, Inc. ! Diff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 2) The authors state that empirical tests of purchasing power parity "have, for the most part, not proved PPP to be accurate in predicting future exchange rates." The authors then state that PPP does hold up reasonably well in two situations. What are some reasons why PPP does not accurately predict future exchange rates, and under what conditions might we reasonably expect PPP to hold? Answer: PPP does not hold because goods and services do not move without cost between countries and markets. Often, goods and services are nor perfect substitutes in every market for reasons of availability, taste, quality, and production techniques. Having said that, PPP does appear to work reasonably well over the long run and especially in countries with higher rates of inflation and underdeveloped capital markets. Diff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 67 Copyright 2010 Pearson Education, Inc. ! 3) The Fisher Effect is a familiar economic theory in the domestic market. In words, define the Fisher Effect and explain why you think it is also appropriately applied to international markets. Answer: Irving Fisher was an early 20th century economist who hypothesized that all market determined nominal interest rates had at least two basic components. First, a real return is required to compensate investors for postponing current consumption. This real rate is constant and unaffected by expectations about inflation. Second, an expected inflation component is required so that investors would not expect to lose purchasing power by the act of forgoing current consumption. Intuitively, if capital can move freely among international markets these same requirements must exist in each of the capital markets and the Fisher Effect would apply internationally as well as domestically. Diff: 3 Topic: 7.1 Prices and Exchange Rates Skill: Analytical 7.2 Interest Rates and Exchange Rates M u l t i p l e C hoi c e 1) ________ states that nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation. A) Absolute PPP B) Relative PPP C) The Law of One Price D) The Fisher Effect Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 2) In its approximate form the Fisher effect may be written as ________. Where: i = the nominal /01)'#2'341)/)516'/'7'18)'/)0%'/01)'#2'/)1$/4'04&'9'7'18)'):;)<1)&'/01)'#2'342%013#4+ =>'3'7'?/>?9> @>'3'7'/'A'9'A'?/>?9> B>'3'7'/'A'9 C>'3'7'/'A'D'9 Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 68 Copyright 2010 Pearson Education, Inc. ! 3) Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year? A) 2.10% B) 2.05% C) 2.00% D) 1.90% Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 4) Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U.S. over the next year? A) 1.84% B) 1.80% C) 1.76% D) 1.72% Register to View AnswerDiff: 3 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 5) The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as ________. A) absolute PPP B) the law of one price C) relative PPP D) the international Fisher Effect Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 69 Copyright 2010 Pearson Education, Inc. ! 6) According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years. A) British pound; appreciate B) British pound; revalue C) U.S. dollar; appreciate D) U.S. dollar; depreciate Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 7) ________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries. A) Fisher-open B) Fisher-closed C) The Fisher Effect D) None of the above Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 8) A ________ is an exchange rate quoted today for settlement at some time in the future. A) spot rate B) forward rate C) currency rate D) yield curve Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 9) Assume the current U.S. dollar-British spot rate is 0.6993/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days? A) 1.42/$ B) 1.43/$ C) 0.6993/$ D) 0.7060/$ Register to View AnswerDiff: 3 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 70 Copyright 2010 Pearson Education, Inc. ! 10) Assume the current U.S. dollar-yen spot rate is 125/$. Further, the current nominal 180-day rate of return in Japan is 3% and 4% in the United States. What is the approximate forward exchange rate for 180 days? A) 123.80/$ B) 124.00/$ C) 124.39/$ D) 124.67/$ Register to View AnswerDiff: 3 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 11) The current U.S. dollar-yen spot rate is 125/$. If the 90-day forward exchange rate is 127 /$ then the yen is selling at a per annum ________ of ________. A) premium; 1.57% B) premium; 6.30% C) discount; 1.57% D) discount; 6.30% Register to View AnswerDiff: 3 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 12) The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs. A) international Fisher Effect B) absolute PPP C) interest rate parity D) the law of one price Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 13) With cove r ed int e r est a rbi t r age, A) the market must be out of equilibrium. B) a "riskless" arbitrage opportunity exists. C) the arbitrageur trades in both the spot and future currency exchange markets. D) all of the above Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 71 Copyright 2010 Pearson Education, Inc. ! 14) Covered interest arbitrage moves the market ________ equilibrium because ________ A) toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two. B) toward; investors are now more willing to invest in risky securities. C) away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two. D) away from; demand for the stronger currency forces up interest rates on the weaker security. Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual T r u e/ F a l se E>'F8)'2340%'<#G;#4)41'#2'18)')H$013#4'2#/'18)'I358)/'J22)<16'?/>?9>6'"8)/)'/'7'18)'/)0%'/01)'#2' /)1$/4'04&'9'7'18)'):;)<1)&'/01)'#2'342%013#46'35'#21)4'&/#;;)&'2/#G'18)')H$013#4'()<0$5)'18)' number is simply too large for most Western economies. Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Recognition 2) Empirical studies show that the Fisher Effect works best for short-term securities. Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual 3) The current U.S. dollar-yen spot rate is 125/$. If the 90-day forward exchange rate is 127 /$ then the yen is at a forward premium. Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual 4) The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount. Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual 72 Copyright 2010 Pearson Education, Inc. ! 5) Use interest rate parity to answer this question. A U.S. investor has a choice between a riskfree one-year U.S. security with an annual return of 4%, and a comparable British security with a return of 5%. If the spot rate is $1.43/, the forward rate is $1.44/, and there are no transaction costs, the investor should invest in the U.S. security. Register to View AnswerDiff: 2 Topic: 7.2 Interest Rates and Exchange Rates Skill: Analytical 6) Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete. Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual 7) All that is required for a covered interest arbitrage profit is for interest rate parity to not hold. Register to View AnswerDiff: 1 Topic: 7.2 Interest Rates and Exchange Rates Skill: Conceptual 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate M u l t i p l e C hoi c e 1) If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true? A) The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. B) The distribution of possible actual spot rates in the future is centered on the forward rate. C) The future spot rate will actually be equal to what the forward rate predicts. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate Skill: Recognition 2) Which of the following is NOT an assumption of market efficiency? A) Instruments denominated in other currencies are perfect substitutes for one another. B) Transaction costs are low or nonexistent. C) All relevant information is quickly reflected in both spot and forward exchange markets. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate Skill: Recognition 73 Copyright 2010 Pearson Education, Inc. ! 3) Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________. A) conflicting; not efficient B) conflicting; efficient C) consistent; inefficient D) none of the above Register to View AnswerDiff: 2 Topic: 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate Skill: Recognition T r u e/ F a l se 1) If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates. Register to View AnswerDiff: 1 Topic: 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate Skill: Conceptual 2) If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates. Register to View AnswerDiff: 1 Topic: 7.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate Skill: Conceptual 7.4 Prices, Interest Rates, and Exchange Rates in Equilibrium M u l t i p l e C hoi c e 1) According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to: A) the current spot rate multiplied by the ratio of the inflation rates in the respective countries. B) but the opposite sign to the different between nominal interest rates. C) but the opposite sign to the difference between inflation rates. D) but the opposite sign to the difference between real interest rates. Register to View AnswerDiff: 1 Topic: 7.4 Prices, Interest Rates, and Exchange Rates in Equilibrium Skill: Recognition 74 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) In their approximate form, PPP, IRP, and forward rates as an unbiased predictor of the future spot rate lead to similar forecasts of the future spot rate. Register to View AnswerDiff: 1 Topic: 7.4 Prices, Interest Rates, and Exchange Rates in Equilibrium Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 8 F o r e i g n C u r r e n c y D e r i v a t i v es 8.1 Foreign Currency Futures M u l t i p l e C hoi c e 1) Financial derivatives are powerful tools that can be used by management for purposes of A) speculation. B) hedging. C) human resource management. D) A and B above. Register to View AnswerDiff: 1 Topic: 8.1 Foreign Currency Futures Skill: Recognition 2) A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price. A) futures B) forward C) option D) swap Register to View AnswerDiff: 1 Topic: 8.1 Foreign Currency Futures Skill: Recognition 3) Which of the following is NOT a contract specification for currency futures trading on an organized exchange? A) Size of the contract. B) Maturity date. C) Last trading day. D) All of the above are specified. Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Recognition 75 Copyright 2010 Pearson Education, Inc. ! 76 Copyright 2010 Pearson Education, Inc. ! 4) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. A) 0% B) 5% C) 50% D) 95% Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Analytical 5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a A) collateralized deposit. B) marked market sum. C) margin. D) settlement. Register to View AnswerDiff: 1 Topic: 8.1 Foreign Currency Futures Skill: Recognition 6) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract. A) buy; sell B) sell; buy C) buy; buy D) none of the above Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Conceptual 7) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Recognition 77 Copyright 2010 Pearson Education, Inc. ! 8) Peter Simpson thinks that the U.K. pound will cost $1.43/ in six months. A 6-month currency futures contract is available today at a rate of $1.44/. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell a pound currency futures contract. B) Buy a pound currency futures contract. C) Sell pounds today. D) Sell pounds in six months. Register to View AnswerDiff: 3 Topic: 8.1 Foreign Currency Futures Skill: Conceptual 9) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of 62,500, how much money did Jack gain or lose from his speculation with pound futures? A) $937.50 loss B) $937.50 gain C) 937.50 loss D) 937.50 gain Register to View AnswerDiff: 3 Topic: 8.1 Foreign Currency Futures Skill: Analytical 10) Which of the following statements regarding currency futures contracts and forward contracts is NOT true? A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Conceptual 78 Copyright 2010 Pearson Education, Inc. ! 11) Which of the following is NOT a difference between a currency futures contract and a forward contract? A) The futures contract is marked to market daily whereas the forward contract is only due to be settled at maturity. B) The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction whereas the forward contract participants are in direct contact setting the forward specifications. C) A single sales commission covers both the purchase and sale of a futures contract whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 8.1 Foreign Currency Futures Skill: Conceptual T r u e/ F a l se 1) Currency futures contracts have become standard fare and trade readily in the world money centers. Register to View AnswerDiff: 1 Topic: 8.1 Foreign Currency Futures Skill: Recognition 2) The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients. Register to View AnswerDiff: 1 Topic: 8.1 Foreign Currency Futures Skill: Recognition E ssa y 1) Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses? Answer: Foreign currency futures are standardized contracts that lend themselves well to speculation purposes but less so for hedging purposes. The standardized nature of the futures contract makes it easy to trade futures and to make bets about general changes in the value of currencies. Forward contracts are better for hedging in that they are tailored to meet the specific needs of the client, typically a business, and can be quite useful in reducing exchange rate risk. Banks are involved in the foreign currency futures market in part to offset positions that they may have taken in the forward markets as dealers. Diff: 3 Topic: 8.1 Foreign Currency Futures Skill: Conceptual 79 Copyright 2010 Pearson Education, Inc. ! 2) Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange. Answer: Foreign currency futures are derivative securities that allow the holder to lock in a price today for another currency at some point in the future. The foreign currency future contract is an obligation on the part of the parties to fulfill the terms of the contract. Even if prices change in an unanticipated way, the parties are obligated to fulfill the terms of the contract. The foreign currency option contract on the other hand is a right not an obligation to purchase/sell a currency at some point in the future at a price agreed upon today. If prices change in an unexpected manner, the buyer of the contract is under no obligation to exercise the contract. Option contracts are better suited to situations where price changes are anticipated, but the direction of the change is highly uncertain. Diff: 3 Topic: 8.1 Foreign Currency Futures Skill: Analytical 8.2 Currency Options M u l t i p l e C hoi c e 1) A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period. A) future B) forward C) option D) swap Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 2) A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, buy, put, sell B) call, sell, put, buy C) put, hold, call, release D) none of the above Register to View AnswerDiff: 2 Topic: 8.2 Currency Options Skill: Recognition 80 Copyright 2010 Pearson Education, Inc. ! 3) The price at which an option can be exercised is called the ________. A) premium. B) spot rate. C) strike price. D) commission. Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 4) An ________ option can be exercised only on its expiration date, whereas an ________ option can be exercised anytime between the date of writing up to and including the exercise date. A) American; European B) American; British C) Asian; American D) European; American Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 5) A call option whose exercise price exceeds the spot price is said to be ________. A) in-the-money B) at-the-money C) out-of-the-money D) over-the-spot Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 6) A call option whose exercise price is less than the spot price is said to be ________. A) in-the-money B) at-the-money C) out-of-the-money D) under-the-spot Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 81 Copyright 2010 Pearson Education, Inc. ! 7) An option whose exercise price is equal to the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-the-money D) on-the-spot Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 8) The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are) A) expiration dates tailored to the needs of the client. B) amounts that are tailor made. C) client desired expiration dates. D) all of the above Register to View AnswerDiff: 2 Topic: 8.2 Currency Options Skill: Recognition 9) As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________. A) exchange markets; over-the-counter B) over-the-counter; exchange markets C) private; government sponsored D) government sponsored; private Register to View AnswerDiff: 2 Topic: 8.2 Currency Options Skill: Recognition 82 Copyright 2010 Pearson Education, Inc. ! T A B L E 8.1 U se t h e b e low m e n t ion e d t a b l e to a n sw e r f ol low i n g q u est ion (s). April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). 10) Refer to Table 8.1. What was the closing price of the British pound on April 18, 2009? A) $1.448/ B) 1.448/$ C) $14.48/ D) None of the above Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Analytical 11) Refer to Table 8.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________. A) 1460; 0.68 cents; $425.00. B) 1440; 1.06 cents; $662.50. C) 1450; 1.02 cents; $637.50. D) 1440; 1.42 cents; $887.50. Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Analytical 12) Refer to Table 8.1. The May call option on pounds with a strike price of 1440 means ________. A) $88/ per contract. B) $0.88/. C) $0.0088/. D) none of the above Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Analytical 83 Copyright 2010 Pearson Education, Inc. ! 13) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Buy a call on the pound. B) Sell a call on the pound. C) Buy a put on the pound. D) Sell a put on the pound. Register to View AnswerDiff: 2 Topic: 8.2 Currency Options Skill: Conceptual 14) A put option on yen is written with a strike price of 105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) 100/$ B) 105/$ C) 110/$ D) 115/$ Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Conceptual 15) A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) $1.20/euro B) $1.25/euro C) $1.30/euro D) $1.35/euro Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Conceptual 16) A call option on UK pounds has a strike price of $2.05/ and a cost of $0.02. What is the break-even price for the option? A) $2.03/ B) $2.07/ C) $2.05/ D) The answer depends upon if this is a long or a short call option. Register to View AnswerDiff: 3 Topic: 8.2 Currency Options Skill: Analytical 84 Copyright 2010 Pearson Education, Inc. ! 17) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should A) buy a pound put option. B) sell a pound put option. C) buy a pound call option. D) sell a pound call option. Register to View AnswerDiff: 2 Topic: 8.2 Currency Options Skill: Conceptual T r u e/ F a l se 1) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder. Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 2) Foreign currency options are available both over-the-counter and on organized exchanges. Register to View AnswerDiff: 1 Topic: 8.2 Currency Options Skill: Recognition 8.3 Foreign Currency Speculation M u l t i p l e C hoi c e 1) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6month forward rate is 128.53/$. Andrea thinks the yen will move to 128.00/$ in the next six months. Andrea should ________ at ________ to profit from changing currency values. A) buy yen; at the forward rate B) buy dollars; at the forward rate C) sell yen; at the forward rate D) There is not enough information to answer this question. Register to View AnswerDiff: 3 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 85 Copyright 2010 Pearson Education, Inc. ! 2) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6month forward rate is 128.53/$. Andrea thinks the yen will move to 128.00/$ in the next six months. If Andrea buys $100,000 worth of yen at today's spot price and sells within the next six months at 128/$ she will earn a profit of ________. A) $146.09 B) $101,460.94 C) $1460.94 D) nothing; she will lose money Register to View AnswerDiff: 3 Topic: 8.3 Foreign Currency Speculation Skill: Analytical 3) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6month forward rate is 128.53/$. Andrea thinks the yen will move to 128.00/$ in the next six months. If Andrea buys $100,000 worth of yen at today's spot price her potential gain is ________ and her potential loss is ________. A) $100,000; unlimited B) unlimited; unlimited C) $100,000; $100,000 D) unlimited; $100,000 Register to View AnswerDiff: 3 Topic: 8.3 Foreign Currency Speculation Skill: Analytical 4) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6month forward rate is 128.53/$. Andrea thinks the yen will move to 128.00/$ in the next six months. If Andrea's expectations are correct, then she could profit in the forward market by ________ and then ________. A) buying yen for 128.00/$; selling yen at 128.53/$ B) buying yen for 128.53/$; selling yen at 128.00/$ C) There is not enough information to answer this question D) She could not profit in the forward market. Register to View AnswerDiff: 3 Topic: 8.3 Foreign Currency Speculation Skill: Analytical 86 Copyright 2010 Pearson Education, Inc. ! 5) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________. A) unlimited; the premium paid. B) the premium paid; unlimited. C) unlimited; unlimited. D) unlimited; the value of the underlying asset. Register to View AnswerDiff: 2 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 6) The buyer of a long call option A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has an unlimited maximum gain potential. D) all of the above Register to View AnswerDiff: 1 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 7) Which of the following is NOT true for the writer of a call option? A) The maximum loss is unlimited. B) The maximum gain is unlimited. C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. D) All of the above are true. Register to View AnswerDiff: 1 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 8) Which of the following is NOT true for the writer of a put option? A) The maximum loss is limited to the strike price of the underlying asset less the premium. B) The gain or loss is equal to but of the opposite sign of the buyer of a put option. C) The maximum gain is the amount of the premium. D) All of the above are true. Register to View AnswerDiff: 1 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 87 Copyright 2010 Pearson Education, Inc. ! 9) The buyer of a long put option A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has maximum gain potential limited to the difference between the strike price and the premium paid. D) all of the above Register to View AnswerDiff: 2 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 10) The value of a European style call option is the sum of two components, the A) present value plus the intrinsic value. B) time value plus the present value. C) intrinsic value plus the time value. D) the intrinsic value plus the standard deviation. Register to View AnswerDiff: 2 Topic: 8.3 Foreign Currency Speculation Skill: Recognition T r u e/ F a l se 1) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6month forward rate is 128.53/$. Andrea would earn a higher rate of return by buying yen and a forward contract than if she had invested her money in 6-month US Treasury securities at an annual rate of 2.50%. Register to View AnswerDiff: 3 Topic: 8.3 Foreign Currency Speculation Skill: Analytical 2) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts. Register to View AnswerDiff: 1 Topic: 8.3 Foreign Currency Speculation Skill: Conceptual 88 Copyright 2010 Pearson Education, Inc. ! 8.4 Option Pricing and Valuation M u l t i p l e C hoi c e 1) Which of the following is NOT a factor in determining the premium price of a currency option? A) The present spot rate. B) The time to maturity. C) The standard deviation of the daily spot price movement. D) All of the above are factors in determining the premium price. Register to View AnswerDiff: 2 Topic: 8.4 Option Pricing and Valuation Skill: Recognition 2) The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ value. A) intrinsic value; maximum B) intrinsic value; minimum C) time value; maximum D) time value; minimum Register to View AnswerDiff: 2 Topic: 8.4 Option Pricing and Valuation Skill: Recognition 3) Assume that a call option has an exercise price of $1.50/!. At a spot price of $1.45/!, the call option has ________. A) a time value of $0.04. B) a time value of $0.00. C) an intrinsic value of $0.00. D) an intrinsic value of -$0.04. Register to View AnswerDiff: 2 Topic: 8.4 Option Pricing and Valuation Skill: Analytical T r u e/ F a l se 1) The time value is asymmetric in value as you move away from the strike price. (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.) Register to View AnswerDiff: 2 Topic: 8.4 Option Pricing and Valuation Skill: Conceptual 89 Copyright 2010 Pearson Education, Inc. ! 8.5 Currency Option Pricing Sensitivity M u l t i p l e C hoi c e 1) Volatility cannot be directly observed for calculation purposes of the option pricing model. Therefore, it may be determined from A) historic volatility. B) forward-looking volatility. C) implied volatility. D) any of the above Register to View AnswerDiff: 2 Topic: 8.5 Currency Option Pricing Sensitivity Skill: Recognition 2) ________ volatility are calculated by being backed out of the market option premium values traded. A) Historic B) Forward-looking C) Implied D) none of the above Register to View AnswerDiff: 2 Topic: 8.5 Currency Option Pricing Sensitivity Skill: Recognition T r u e/ F a l se 1) Other things equal, the price of an option goes up as the volatility of the option decreases. Register to View AnswerDiff: 2 Topic: 8.5 Currency Option Pricing Sensitivity Skill: Conceptual 2) Volatilities are the only judgmental aspect of currency option pricing and are therefore, the least important component therein. Register to View AnswerDiff: 2 Topic: 8.5 Currency Option Pricing Sensitivity Skill: Conceptual 90 Copyright 2010 Pearson Education, Inc. ! 8.6 Prudence in Practice M u l t i p l e C hoi c e 1) The authors quote an essay on risk from Peter Bernstein in which he states each of the following EXCEPT: A) It is hubris to believe that we can put reliable and stable numbers on the return of the stock market over the next 2, 20, or 50 years. B) It is rational to use probability instead of timing to demonstrate that an event with low probability is therefore unlikely to ever occur. C) The science of risk management is capable of creating new risks even as it brings old risks under control. D) All of the above are part of Peter Bernstein's essay. Register to View AnswerDiff: 2 Topic: 8.6 Prudence in Practice Skill: Recognition T r u e/ F a l se 1) Major corporate financial disasters related to financial derivatives continue to be a problem in global business. Register to View AnswerDiff: 2 Topic: 8.6 Prudence in Practice Skill: Conceptual M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 9 I n t e r es t R a t e a n d C u r r e n c y S w a p s 9.1 Defining Interest Rate Risk M u l t i p l e C hoi c e 1) The single largest interest rate risk of a firm is ________. A) interest sensitive securities B) debt service C) dividend payments D) accounts payable Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 2) A ________ rate is the rate of interest used in a standardized quotation, loan agreement, or financial derivative valuation. A) reference rate 91 Copyright 2010 Pearson Education, Inc. ! B) central rate C) benchmark rate D) none of the above Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 3) The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________. A) Federal Reserve Discount rate B) federal funds rate C) LIBOR D) one-year U.S. Treasury Bill Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 92 Copyright 2010 Pearson Education, Inc. ! 4) LIBOR is an acronym for A) Latest Interest Being Offered Rate. B) Large International Bank Offered Rate. C) Least Interest Bearing: Official Rate. D) London Interbank Offered Rate. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 5) ________ is the possibility that the borrower's credit worthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set. A) Credit risk; Interest rate risk B) Repricing risk; Credit risk C) Interest rate risk; Credit risk D) Credit risk; Repricing risk Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition I n s t r u c t i o n 9.1 : For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ! ! ! Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. 6) Refer to Instruction 9.1. Choosing strategy #1 will A) guarantee the lowest average annual rate over the next three years. B) eliminate credit risk but retain repricing risk. C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. D) preclude the possibility of sharing in lower interest rates over the three-year period. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 93 Copyright 2010 Pearson Education, Inc. ! 7) Refer to Instruction 9.1. Choosing strategy #2 will A) guarantee the lowest average annual rate over the next three years. B) eliminate credit risk but retain repricing risk. C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. D) preclude the possibility of sharing in lower interest rates over the three-year period. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 8) Refer to Instruction 9.1. Choosing strategy #3 will A) guarantee the lowest average annual rate over the next three years. B) eliminate credit risk but retain repricing risk. C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. D) preclude the possibility of sharing in lower interest rates over the three-year period. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 9) Refer to Instruction 9.1. Which strategy (strategies) will eliminate credit risk? A) Strategy #1 B) Strategy #2 C) Strategy #3 D) Strategy #1 and #2 Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 10) Refer to Instruction 9.1. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.) A) Strategy #3 B) Strategy #2 C) Strategy #1 D) Strategy #1, #2, or #3, you are indifferent among the choices. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 94 Copyright 2010 Pearson Education, Inc. ! 11) Refer to Instruction 9.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is (Assume your firm is borrowing money.) A) that interest rates might go down or that your credit rating might improve. B) that interest rates might go up or that your credit rating might improve. C) that interest rates might go up or that your credit rating might get worse. D) none of the above Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 12) Refer to Instruction 9.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is (Assume your firm is borrowing money.) A) that interest rates might go down or that your credit rating might improve. B) that interest rates might go up or that your credit rating might improve. C) that interest rates might go up or that your credit rating might get worse. D) none of the above Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 13) Refer to Instruction 9.1. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.) A) Your credit rating stayed the same and interest rates went up. B) Your credit rating stayed the same and interest rates went down. C) Your credit rating improved and interest rates went down. D) Not enough information to make a judgment. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 14) Refer to Instruction 9.1. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.) A) Your credit rating stayed the same and interest rates went up. B) Your credit rating stayed the same and interest rates went down. C) Your credit rating improved and interest rates went down. D) Not enough information to make a judgment. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual 95 Copyright 2010 Pearson Education, Inc. ! 15) Refer to Instruction 9.1. After the fact, under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.) A) Your credit rating stayed the same and interest rates went up. B) Your credit rating stayed the same and interest rates went down. C) Your credit rating improved and interest rates went down. D) Not enough information to make a judgment. Register to View AnswerDiff: 2 Topic: 9.1 Defining Interest Rate Risk Skill: Conceptual T r u e/ F a l se 1) The Federal Funds rate is the most common reference rate for international interest rate calculations. Register to View AnswerDiff: 1 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 2) Credit risk is the risk of changes in interest rates charged (earned) at the time a financial rate is reset. Register to View AnswerDiff: 1 Topic: 9.1 Defining Interest Rate Risk Skill: Recognition 9.2 Management of Interest Rate Risk M u l t i p l e C hoi c e 1) As a management tool, a ________ is a rule, but a ________ is an objective. A) policy; goal B) goal; policy C) FIBOR; GIBOR D) none of the above Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 96 Copyright 2010 Pearson Education, Inc. ! 2) The following would be an example of a policy, not a goal. A) Management shall minimize the firm's overall weighted average cost of capital. B) Management shall maximize shareholder's wealth. C) Management will not write uncovered options. D) Management will hire only happy employees. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 3) Which of the following is NOT true regarding a corporate policy? A) A policy is intended to limit or restrict management actions. B) Policies make management decision-making more difficult in potentially harmful situations. C) A policy is intended to restrict some subjective management decision-making. D) A policy is intended to establish operating guidelines independently of staff. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual T A B L E 9.1 U se t h e i n f o r m a t ion f o r Pol a r is C o r p o r a t ion to a n sw e r f ol low i n g q u est ion (s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% 4) Refer to Table 9.1. What is the all-in-cost (i.e., the internal rate of return) of the Polaris loan including the LIBOR rate, fixed spread and upfront fee? A) 4.00% B) 5.00% C) 5.53% D) 6.09% Register to View AnswerDiff: 3 Topic: 9.2 Management of Interest Rate Risk Skill: Analytical 97 Copyright 2010 Pearson Education, Inc. ! 5) Refer to Table 9.1. What portion of the cost of the loan is at risk of changing? A) the LIBOR rate B) the spread C) the upfront fee D) all of the above Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 6) Refer to Table 9.1. If the LIBOR rate jumps to 5.00% after the first year what will be the allin-cost (i.e. the internal rate of return) for Polaris for the entire loan? A) 5.25% B) 5.50% C) 6.09% D) 6.58% Register to View AnswerDiff: 3 Topic: 9.2 Management of Interest Rate Risk Skill: Analytical 7) Refer to Table 9.1. If the LIBOR rate falls to 3.00% after the first year what will be the all-incost (i.e. the internal rate of return) for Polaris for the entire loan? A) 4.00% B) 4.50% C) 5.25% D) 5.60% Register to View AnswerDiff: 3 Topic: 9.2 Management of Interest Rate Risk Skill: Analytical 8) Refer to Table 9.1. Polaris could have locked in the future interest rate payments by using A) a forward rate agreement. B) an interest rate future. C) an interest rate swap. D) any of the above Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 98 Copyright 2010 Pearson Education, Inc. ! 9) An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an ________. A) forward rate agreement B) interest rate future C) interest rate swap D) none of the above Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 10) A/an ________ is a contract to lock in today interest rates over a given period of time. A) forward rate agreement B) interest rate future C) interest rate swap D) none of the above Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 11) An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an ________. A) forward rate agreement B) interest rate future C) interest rate swap D) none of the above Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 12) The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could A) sell an interest rate futures contract of a similar maturity to the loan. B) buy an interest rate futures contract of a similar maturity to the loan. C) swap the adjustable rate loan for another of a different maturity. D) none of the above Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 99 Copyright 2010 Pearson Education, Inc. ! 13) An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an ________. A) currency swap B) forward swap C) interest rate swap D) none of the above Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 14) An agreement to swap the currencies of a debt service obligation would be termed a/an ________. A) currency swap B) forward swap C) interest rate swap D) none of the above Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 15) Which of the following would be considered an example of a currency swap? A) Exchanging a dollar interest obligation for a British pound obligation. B) Exchanging a eurodollar interest obligation for a dollar obligation. C) Exchanging a eurodollar interest obligation for a British pound obligation. D) All of the above are examples of a currency swap. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 16) A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to A) pay fixed-rate interest and receive floating rate interest. B) pay floating rate and receive fixed rate. C) pay fixed rate and receive fixed rate. D) pay floating rate and receive floating rate. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 100 Copyright 2010 Pearson Education, Inc. ! 17) A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to A) pay fixed-rate interest and receive floating rate interest. B) pay floating rate and receive fixed rate. C) pay fixed rate and receive fixed rate. D) pay floating rate and receive floating rate. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 18) The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to A) do nothing. B) pay floating and receive fixed. C) receive floating and pay fixed. D) none of the above. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 19) The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called ________. A) interest rate risk B) credit risk C) counterparty risk D) clearinghouse risk Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition T r u e/ F a l se 1) Historically, interest rate movements have shown less variability and greater stability than exchange rate movements. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 101 Copyright 2010 Pearson Education, Inc. ! 2) Unlike the situation with exchange rate risk, there is no uncertainty on the part of management for shareholder preferences regarding interest rate risk. Shareholders prefer that managers hedge interest rate risk rather than having shareholders diversify away such risk through portfolio diversification. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 3) Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 4) A basis point is one-tenth of one percent. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 5) A swap agreement may involve currencies or interest rates, but never both. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 6) Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR. Register to View AnswerDiff: 1 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 7) Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives. Register to View AnswerDiff: 2 Topic: 9.2 Management of Interest Rate Risk Skill: Recognition 102 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up. Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm. Answer: Sell a futures position. If rates change the payoff from the futures position offsets the gain or loss on the variable rate debt obligation. Swap a variable rate debt obligation for a fixed futures payable contract. Diff: 3 Topic: 9.2 Management of Interest Rate Risk Skill: Analytical 2) How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives? Answer: With exchange-traded derivatives, the exchange is the clearinghouse. Thus, firms do not need to worry about the other party making good on its obligations and it is easier to trade the derivative products. Diff: 3 Topic: 9.2 Management of Interest Rate Risk Skill: Conceptual 9.3 Trident Corporation: Swapping to Fixed Rates M u l t i p l e C hoi c e 1) Johnson Industries is currently paying a variable rate loan and desires greater certainty with regard to their loan payments. Refinancing is currently not available so they decide to pursue an interest rate swap agreement. Which of the following will help Johnson stabilize their anticipated cash outflows? Enter into an agreement to: A) Receive LIBOR and pay a quoted rate. B) Receive a quoted rate and pay LIBOR + 1.50%. C) Receive LIBOR and pay LIBOR + 1.50%. D) None of the above will help Johnson Industries pay a fixed amount for their obligations. Register to View AnswerDiff: 2 Topic: 9.3 Trident Corporation: Swapping to Fixed Rates Skill: Analytical T r u e/ F a l se 1) Swap agreements replace existing loan agreements. Register to View AnswerDiff: 2 Topic: 9.3 Trident Corporation: Swapping to Fixed Rates Skill: Recognition 103 Copyright 2010 Pearson Education, Inc. ! 9.4 Currency Swaps M u l t i p l e C hoi c e 1) Which of the following is an unlikely reason for firms to participate in the swap market? A) To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. B) Firms may raise capital in one currency but desire to repay it in another currency. C) Firms desire to swap fixed and variable payment or receipt of funds. D) All of the above are likely reasons for a firm to enter the swap market. Register to View AnswerDiff: 2 Topic: 9.4 Currency Swaps Skill: Recognition T r u e/ F a l se 1) Swap rates are derived from the yield curves in each major currency. Register to View AnswerDiff: 2 Topic: 9.4 Currency Swaps Skill: Recognition 9.5 Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs M u l t i p l e C hoi c e 1) A firm enters into an agreement to ________ British pounds and ________ U.S. dollars. If the dollar appreciates vs. the pound the firm will realize an accounting profit on the swap transaction. A) pay; receive B) receive; pay C) pay; pay D) receive; receive Register to View AnswerDiff: 2 Topic: 9.5 Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs Skill: Recognition T r u e/ F a l se 1) A firm enters into a swap agreement to pay euros and receive U.S. dollars. If the euro appreciates the firm will record a loss on the swap for accounting purposes. Register to View AnswerDiff: 2 Topic: 9.5 Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs Skill: Recognition 104 Copyright 2010 Pearson Education, Inc. ! 9.6 Counterparty Risk M u l t i p l e C hoi c e 1) ________ is the potential exposure any individual firm bears that the second party to any 23404<30%'<#41/0<1'"3%%'()'$40(%)'1#'2$%23%%'315'#(%3K013#4'$4&)/'18)'<#41/0<1Ls specifications. A) Inflation risk B) Counterparty risk C) Purchasing power risk D) Swap agreement risk Register to View AnswerDiff: 2 Topic: 9.6 Counterparty Risk Skill: Recognition T r u e/ F a l se 1) A firm entering into a currency or interest rate swap agreement retains ultimate responsibility for the timely servicing of its own debt obligations. Register to View AnswerDiff: 2 Topic: 9.6 Counterparty Risk Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 10 F o r e ign E x c h a n ge R a t e D e t e r m i n a t ion a n d F o r e c ast i n g 10.1 Exchange Rate Determination: The Theoretical Thread M u l t i p l e C hoi c e 1) An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories. A) competing; complementary B) competing; contemporary C) complementary; contiguous D) complementary; competing Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 2) Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s? A) Infrastructure weaknesses. 105 Copyright 2010 Pearson Education, Inc. ! B) Speculation on the part of market participants. C) The sharp reduction of cross-border foreign direct investment. D) All of the above contributed to the emerging markets exchange rate collapse of the 1990s. Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 3) The ________ provides a means to account for international cash flows in a standardized and systematic manner. A) parity conditions B) asset approach C) balance of payments D) international Fisher effect Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 106 Copyright 2010 Pearson Education, Inc. ! 4) The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities. A) balance of payments B) monetary C) asset market D) law of one price Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 5) The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock. A) balance of payments B) monetary C) asset market D) law of one price Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 6) The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets A) balance of payments B) monetary C) asset market D) law of one price Register to View AnswerDiff: 2 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition T r u e/ F a l se 1) It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined. Register to View AnswerDiff: 1 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual 107 Copyright 2010 Pearson Education, Inc. ! 2) The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making. Register to View AnswerDiff: 1 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition 3) Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories. Register to View AnswerDiff: 1 Topic: 10.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual 10.2 The Asset Market Approach to Forecasting M u l t i p l e C hoi c e 1) The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability. A) balance of payments B) parity conditions C) managed float D) asset market Register to View AnswerDiff: 2 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Recognition 2) The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices? A) Relative real interest rates. B) Capital market liquidity. C) Political safety. D) All of the above are considered by investors in their decision process. Register to View AnswerDiff: 2 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Recognition 108 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange. Register to View AnswerDiff: 1 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Recognition 2) The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path. Register to View AnswerDiff: 1 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Recognition 3) The asset market approach to forecasting is not applicable to emerging markets. Register to View AnswerDiff: 1 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Recognition E ssa y 1) Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general? Answer: The asset market approach to exchange rate determination looks at relative interest rates and prospects for economic growth and profitability. This is consistent with the pricing of equity securities in that the price of a share of stock should reflect expectations about the timing, magnitude, and risk of future cash flows. In other words, expectations about what is to come is more important to the price of an asset, including currency prices, than what has occurred in the past. Diff: 3 Topic: 10.2 The Asset Market Approach to Forecasting Skill: Analytical 109 Copyright 2010 Pearson Education, Inc. ! 10.3 Disequilibrium: Exchange Rates in Emerging Markets M u l t i p l e C hoi c e 1) Which of the following was NOT an international currency crisis in the 1990s and early 2000s? A) The Asian Crisis. B) The Canadian Crisis. C) The Argentine Crisis. D) All of the above were currency crises in the 1990s and 2000s. Register to View AnswerDiff: 1 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 2) The Asian Currency crisis appeared to begin in ________. A) South Korea. B) Taiwan. C) Thailand. D) Japan. Register to View AnswerDiff: 2 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 3) The "tequila effect" is a slang term used to describe a form of financial panic called ________. A) run on the market B) speculation C) contrary investing D) contagion Register to View AnswerDiff: 2 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 4) Prior to July 2, 1997, the Thai government A) allowed the Thai Bhat to float against major currencies. B) fixed the Bhat's value against the Korean won only. C) fixed the Bhat's value against major currencies especially the U.S. dollar. D) none of the above Register to View AnswerDiff: 2 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 110 Copyright 2010 Pearson Education, Inc. ! 5) The authors did NOT identify which of the following as a root of the Asian currency crisis? A) The collapse of some Asian currencies. B) The rate of inflation in the United States. C) Corporate socialism. D) Banking stability and management. Register to View AnswerDiff: 3 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Conceptual 6) The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as ________. A) illegal B) insider trading C) cronyism D) not in my back yard Register to View AnswerDiff: 2 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 7) The principle focus of the IMF bailout efforts during the Asian financial crisis was ________. A) banking liquidity B) shareholder's wealth C) reestablishing fixed currency exchange rates in Asia D) dollarization of Asian currencies Register to View AnswerDiff: 3 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 8) The ________ is the Argentine currency unit. A) peso B) dollar C) real D) peseta Register to View AnswerDiff: 1 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 111 Copyright 2010 Pearson Education, Inc. ! 9) A currency board is A) a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy. B) a recipe for conservative and prudent financial management. C) designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule. D) all of the above Register to View AnswerDiff: 3 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 10) Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment. A) high; high B) low; low C) low; high D) high; low Register to View AnswerDiff: 2 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Conceptual T r u e/ F a l se 1) In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis. Register to View AnswerDiff: 1 Topic: 10.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition 10.4 Forecasting in Practice M u l t i p l e C hoi c e 1) ________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future. A) Mappists B) Trappist Monks C) Filibusters D) Technical analysts Register to View AnswerDiff: 2 Topic: 10.4 Forecasting in Practice Skill: Recognition 112 Copyright 2010 Pearson Education, Inc. ! 2) Examples of a business motivation for long-run exchange rate forecasts include all but which of the following? A) A major capital investment in a foreign country. B) The desire to hedge a 90-day security. C) A portfolio manager considering investing in foreign securities. D) All of the above are examples of a business motivation for long-run exchange rate forecast. Register to View AnswerDiff: 3 Topic: 10.4 Forecasting in Practice Skill: Recognition 3) Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________. A) long-term investment; long-term capital appreciation. B) long-term capital appreciation; desire to hedge a receivable. C) the desire to hedge a payable; the desire for long-term investment. D) the desire for long-term investment; the desire to hedge a payable. Register to View AnswerDiff: 3 Topic: 10.4 Forecasting in Practice Skill: Recognition 4) A major U+M+'G$%134013#40%'23/G'805'2#/)<051'18)')$/#.&#%%0/'/01)'1#'()'!E+E-.*'#4)'N)0/'8)4<)6' and an exchange rate of $1.40 for the British pound () in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year? =>'!E+O-.P @>'PE+O-.! B>'PE+QO.! C>'!E+QO.P Register to View AnswerDiff: 3 Topic: 10.4 Forecasting in Practice Skill: Analytical T r u e/ F a l se 1) The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be. Register to View AnswerDiff: 1 Topic: 10.4 Forecasting in Practice Skill: Conceptual 113 Copyright 2010 Pearson Education, Inc. ! 2) The single most important element of technical analysis is that future exchange rates are based on the current exchange rate. Register to View AnswerDiff: 2 Topic: 10.4 Forecasting in Practice Skill: Recognition 3) The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks. Register to View AnswerDiff: 1 Topic: 10.4 Forecasting in Practice Skill: Conceptual E ssa y 1) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods. Answer: Short-run forecasts are usually more tactical in nature as a firm may desire to reduce exchange rate risk associated with foreign receivable or payables. Technical factors and shortterm market expectations are often more important for short-run forecasters than long-run parity or fundamental economic conditions. Long-run forecasts are more strategic in nature as firms make key decisions about entering new foreign markets. Longer time horizons tend to be less accurate but also require less accuracy. What forecasters typically desire is a general long-run understanding of the relationships between markets. Fundamental analysis and parity conditions tend to be more important than technical factors in this type of forecasting. Diff: 3 Topic: 10.4 Forecasting in Practice Skill: Analytical M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 11 T r a n sa c t io n E x p osu r e 11.1 Types of Foreign Exchange Exposure M u l t i p l e C hoi c e 1) ________ exposure deals with cash flows that result from existing contractual obligations. A) Operating B) Transaction C) Translation D) Economic Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 114 Copyright 2010 Pearson Education, Inc. ! 2) ________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates. A) Operating B) Transaction C) Translation D) Accounting Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 3) Each of the following is another name for operating exposure EXCEPT ________. A) economic exposure B) strategic exposure C) accounting exposure D) competitive exposure Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 115 Copyright 2010 Pearson Education, Inc. ! 4) Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates. A) transaction; operating B) operating; transaction C) operating; accounting D) none of the above Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 5) ________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency. A) Transaction B) Operating C) Economic D) Accounting (aka translation) Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 6) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) accounting; Operating B) operating; Transaction C) transaction; Operating D) transaction; Accounting Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 7) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible. A) transaction; Operating B) accounting; Operating C) accounting; Transaction D) transaction; Translation Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 116 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) As a generalized rule, only realized foreign exchange losses are deductible for tax purposes. Register to View AnswerDiff: 1 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 2) Many MNE s manage foreign exchange exposure centrally, thus gains or losses are always matched with the country of origin. Register to View AnswerDiff: 2 Topic: 11.1 Types of Foreign Exchange Exposure Skill: Recognition 11.2 Why Hedge? M u l t i p l e C hoi c e 1) MNE cash flows may be sensitive to changes in which of the following? A) Exchange rates. B) Interest rates. C) Commodity prices. D) all of the above Register to View AnswerDiff: 1 Topic: 11.2 Why Hedge? Skill: Recognition 2) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________. A) increase; not change B) decrease; not change C) not change; increase D) not change; not change Register to View AnswerDiff: 2 Topic: 11.2 Why Hedge? Skill: Conceptual 117 Copyright 2010 Pearson Education, Inc. ! 3) Which of the following is NOT cited as a good reason for hedging currency exposures? A) Reduced risk of future cash flows is a good planning tool. B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows. C) Currency risk management increases the expected cash flows to the firm. D) Management is in a better position to assess firm currency risk than individual investors. Register to View AnswerDiff: 2 Topic: 11.2 Why Hedge? Skill: Recognition 4) Which of the following is cited as a good reason for NOT hedging currency exposures? A) Shareholders are more capable of diversifying risk than management. B) Currency risk management through hedging does not increase expected cash flows. C) Hedging activities are often of greater benefit to management than to shareholders. D) All of the above are cited as reasons NOT to hedge. Register to View AnswerDiff: 2 Topic: 11.2 Why Hedge? Skill: Recognition T r u e/ F a l se 1) Hedging, or reducing risk, is the same as adding value or return to the firm. Register to View AnswerDiff: 2 Topic: 11.2 Why Hedge? Skill: Conceptual 2) There is considerable question among investors and managers about whether hedging is a good and necessary tool. Register to View AnswerDiff: 1 Topic: 11.2 Why Hedge? Skill: Recognition 3) The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core. Register to View AnswerDiff: 1 Topic: 11.2 Why Hedge? Skill: Conceptual 118 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against. Answer: Foreign exchange currency hedging can reduce the variability of foreign currency receivables or payables by locking in a specific exchange rate in the future via a forward contract, converting currency at the current spot rate using a money market hedge, or minimizing unfavorable exchange rate movement with a currency option. None of these hedging techniques, however, increases the expected value of the foreign currency exchange. In fact, expected value should fall by an amount equal to the cost of the hedge. Generally, those in favor of currency risk management find value in the reduction of variability of uncertain cash flows. Those opposed to currency risk management argue the NPV of such activities are $0 or less and that shareholders can reduce risk themselves more efficiently. For a more complete answer to this question, see page 4 where the author outlines several arguments for and against currency risk management. Diff: 3 Topic: 11.2 Why Hedge? Skill: Analytical 11.3 Measurement of Transaction Exposure M u l t i p l e C hoi c e 1) The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as A) backlog, quotation, and billing exposure. B) billing, backlog, and quotation exposure. C) quotation, backlog, and billing exposure. D) quotation, billing, and backlog exposure. Register to View AnswerDiff: 2 Topic: 11.3 Measurement of Transaction Exposure Skill: Recognition 119 Copyright 2010 Pearson Education, Inc. ! 2) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if A) the exchange rate changes to $2.00/. B) the exchange rate changes to $2.05/. C) the exchange rate doesn't change. D) all of the above Register to View AnswerDiff: 3 Topic: 11.3 Measurement of Transaction Exposure Skill: Analytical 3) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/, the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.05/ the U.S. firm will realize a ________ of ________. A) loss; $2000 B) gain; $2000 C) loss; 2000 D) gain; 2000 Register to View AnswerDiff: 3 Topic: 11.3 Measurement of Transaction Exposure Skill: Analytical 4) A U.S. firm sells merchandise today to a British company for 100,000. The current exchange rate is $2.03/, the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.01/ the U.S. firm will realize a ________ of ________. A) loss; $2,000 B) gain; $2,000 C) loss; 2000 D) gain; 2000 Register to View AnswerDiff: 3 Topic: 11.3 Measurement of Transaction Exposure Skill: Analytical 120 Copyright 2010 Pearson Education, Inc. ! 5) ________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure. A) Forward market hedge B) Money market hedge C) Options market hedge D) All of the above are contractual hedges. Register to View AnswerDiff: 2 Topic: 11.3 Measurement of Transaction Exposure Skill: Recognition 6) A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business. A) financial B) natural C) contractual D) futures Register to View AnswerDiff: 2 Topic: 11.3 Measurement of Transaction Exposure Skill: Recognition T r u e/ F a l se 1) The structure of a money market hedge is similar to a forward hedge. The difference is the cost of the money market hedge is determined by the differential interest rates, while the forward hedge is a function of the forward rates quotation. Register to View AnswerDiff: 2 Topic: 11.3 Measurement of Transaction Exposure Skill: Conceptual 2) In efficient markets, interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same. Register to View AnswerDiff: 1 Topic: 11.3 Measurement of Transaction Exposure Skill: Conceptual 121 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) Currency risk management techniques include forward hedges, money market hedges, and option hedges. Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract. In your diagram, be sure to label the X and Y-axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/, the price of the option is $0.04 the forward rate is $1.52/ and the current spot rate is $1.48/.) Answer: The student should draw and label a diagram that looks similar to the one found on page 14. Diff: 3 Topic: 11.3 Measurement of Transaction Exposure Skill: Analytical 122 Copyright 2010 Pearson Education, Inc. ! 11.4 Management of an Account Payable M u l t i p l e C hoi c e I n s t r u c t i o n 11 . 2 : U se t h e i n f o r m a t ion f o r t h e f ol l ow i n g p r ob l e m(s). Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ! ! ! ! ! ! ! ! ! ! The spot exchange rate is $1.40/euro The six month forward rate is $1.38/euro OTI's cost of capital is 11% The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) The U.S. 6-month lending rate is 6% (or 3% for 6 months) December call options for euro 625,000; strike price $1.42, premium price is 1.5% OTI's forecast for 6-month spot rates is $1.43/euro The budget rate, or the highest acceptable purchase price for this project, is $3,625,000 or $1.45/euro 1) Refer to Instruction 11.2. If OTI chooses NOT to hedge their euro payable, the amount they pay in six months will be ________. A) $3,500,000 B) $3,450,000 B>'!R6OQ-6--D) unknown today Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 2) Refer to Instruction 11.2. If OTI chooses to hedge its transaction exposure in the forward market, it will ________ euro 2,500,000 forward at a rate of ________. A) buy; $1.38. B) buy; $1.40. C) sell; $1.38. D) 5)%%S'!E+O-+ Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 123 Copyright 2010 Pearson Education, Inc. ! 3) Refer to Instruction 11.2. OTI chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be ________. A) $2,500,000 B) $3,450,000 C) $3,500,000 D) $3,575,000 Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 4) Refer to Instruction 11.2. If OTI locks in the forward hedge at $1.38/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange accounting transaction ________" of ________. A) loss; $50,000. @>'%#55S'!Q-6---+ C) gain; $50,000. C>'K034S'!Q-6---+ Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 5) Refer to Instruction 11.2. OTI would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct. A) better off; $125,000 @>'()11)/'#22S''!EDQ6--C) worse off; $125,000 C>'"#/5)'#22S''!EDQ6--Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 124 Copyright 2010 Pearson Education, Inc. ! 6) Refer to Instruction 11.2. What is the cost of a call option hedge for OTI's euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) A) $52,500 B) $55,388 C) $56,125 D) $58,275 Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical 7) Refer to Instruction 11.2. The cost of a put option to OTI would be ________. A) $52,500 B) $55,388 C) $58,275 D) There is not enough information to answer this question. Register to View AnswerDiff: 3 Topic: 11.4 Management of an Account Payable Skill: Analytical T r u e/ F a l se 1) When attempting to manage an account payable denominated in a foreign currency, the firm's only choice is to remain unhedged. Register to View AnswerDiff: 1 Topic: 11.4 Management of an Account Payable Skill: Recognition 11.5 Risk Management in Practice M u l t i p l e C hoi c e 1) ________ are transactions for which there are, at present, no contracts or agreements between parties. A) Backlog exposure B) Quotation exposure C) Anticipated exposure D) none of the above Register to View AnswerDiff: 2 Topic: 11.5 Risk Management in Practice Skill: Recognition 125 Copyright 2010 Pearson Education, Inc. ! 2) According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is ________. A) translation exposure B) transaction exposure C) contingent exposure D) economic exposure Register to View AnswerDiff: 2 Topic: 11.5 Risk Management in Practice Skill: Recognition 3) According to a survey by Bank of America, when firms do hedge, the most common type of hedging instruments are ________. A) forwards B) options C) money markets D) call and puts Register to View AnswerDiff: 2 Topic: 11.5 Risk Management in Practice Skill: Recognition T r u e/ F a l se 1) The treasury function of most firms, the group typically responsible for transaction exposure management, is NOT usually considered a profit center. Register to View AnswerDiff: 1 Topic: 11.5 Risk Management in Practice Skill: Recognition 2) According to the authors, firms that employ proportional hedges increase the percentage of forward-cover as the maturity of the exposure lengthens. Register to View AnswerDiff: 1 Topic: 11.5 Risk Management in Practice Skill: Recognition 126 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 12 O p e r a t i n g E x p osu r e 12.1 Attributes of Operating Exposure M u l t i p l e C hoi c e 1) Another name for operating exposure is ________ exposure. A) economic B) competitive C) strategic D) all of the above Register to View AnswerDiff: 1 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 2) What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates? A) Transaction exposure. B) Accounting exposure. C) Operating exposure. D) Translation exposure. Register to View AnswerDiff: 1 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 3) ________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity. A) Financing; operating B) Operating; financing C) Operating; accounting D) Accounting; financing Register to View AnswerDiff: 2 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 127 Copyright 2010 Pearson Education, Inc. ! 4) Which of the following is NOT example an of a financial cash flow? A) Parent invested equity capital. B) Interest on intrafirm lending. C) Payment for goods and services. D) Intrafirm principal payments. Register to View AnswerDiff: 2 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 5) Which of the following is NOT an example of an operating cash flow? A) Management fees and distributed overhead. B) Royalties and license fees. C) Rent and lease payments. D) Dividend paid to parent company. Register to View AnswerDiff: 2 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 6) ________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure. A) Operating; translation; transaction B) Transaction; operating; translation C) Accounting; translation; transaction D) Translation; operating; transaction Register to View AnswerDiff: 2 Topic: 12.1 Attributes of Operating Exposure Skill: Conceptual 7) Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use today ________ when preparing operating budgets. A) $102,000 B) $101,000 C) $100,000 D) none of the above Register to View AnswerDiff: 3 Topic: 12.1 Attributes of Operating Exposure Skill: Analytical 128 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes. Register to View AnswerDiff: 1 Topic: 12.1 Attributes of Operating Exposure Skill: Conceptual 2) Operating cash flows may occur in different currencies and at different times, but financing cash flows may occur only in a single currency. Register to View AnswerDiff: 1 Topic: 12.1 Attributes of Operating Exposure Skill: Recognition 3) Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors. Register to View AnswerDiff: 1 Topic: 12.1 Attributes of Operating Exposure Skill: Conceptual 12.2 Strategic Management of Operating Exposure M u l t i p l e C hoi c e 1) Which of the following is NOT an example of diversifying operations? A) Diversifying sales. B) Diversifying location of operations. C) Raising funds in more than one country. D) Sourcing raw materials in more than one country. Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Recognition 2) Which of the following is NOT an example of diversification in financing? A) Raising funds in more than one market. B) Raising funds in more than one country. C) Diversifying sales. D) All of the above qualify. Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Recognition 129 Copyright 2010 Pearson Education, Inc. ! 3) When disequilibria in international markets occur, management can take advantage by A) doing nothing if they are already diversified and able to realize beneficial portfolio effects. B) recognizing disequilibria faster than purely domestic competitors. C) shifting operational of financing activities to take advantage of the disequilibria. D) all of the above Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Conceptual 4) Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because A) domestic firms lack comparative data from its own sources. B) international firms are already so large. C) all of the domestic firm's raw materials are imported. D) None of the above. Domestic firms are not at a disadvantage. Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Conceptual 5) Which of the following is probably NOT an advantage of foreign exchange risk management? A) The reduction of the variability of cash flows due to domestic business cycles. B) Increased availability of capital. C) Reduced cost of capital. D) All of the above are potential advantages of foreign exchange risk management. Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Recognition 6) Which of the following is NOT an example of a form of pol i t i c a l risk that might be avoided or reduced by foreign exchange risk management? A) Expropriation of assets. B) Destruction of raw materials through natural disaster. C) War. D) Unfavorable legal changes. Register to View AnswerDiff: 2 Topic: 12.2 Strategic Management of Operating Exposure Skill: Recognition 130 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Management must be able to predict disequilibria in international markets to take advantage of diversification strategies. Register to View AnswerDiff: 1 Topic: 12.2 Strategic Management of Operating Exposure Skill: Conceptual E ssa y 1) Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk. Answer: An MNE well known in the financial markets could borrow money in a country in which the firm receives foreign currency. The MNE could then use the receivables to repay the loan in the foreign currency and avoid uncertainties in exchange rates. An MNE could establish production facilities in several countries. This could be beneficial in at least two ways. First, such diversification reduces the probability of unfavorable changes in exchange rates for one country from significantly reducing the firm's profitability. Second, an MNE with facilities in several countries is well positioned by using internal sources to recognize when a disequilibria in the market arises. Diff: 3 Topic: 12.2 Strategic Management of Operating Exposure Skill: Conceptual 12.3 Proactive Management of Operating Exposure M u t l i p l e C hoi c e 1) Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk? A) Matching currency cash flows. B) Currency swaps. C) Remaining a purely domestic firm. D) Parallel loans. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 131 Copyright 2010 Pearson Education, Inc. ! 2) Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency? A) Borrow money in the foreign currency in question. B) Lend money in the foreign currency in question. C) Increase sales to that country. D) Increase sales in this country. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 3) Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency? A) Borrow money in the foreign currency in question. B) Lend money in the foreign currency in question. C) Rely on the Federal Reserve Board to enact monetary policy favorable to your exposure risk. D) none of the above Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 4) The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as ________. A) hedging B) diversification C) matching D) balancing Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 5) Which of the following is NOT an acceptable hedging technique to reduce risk caused by a relatively predictable long-term foreign currency inflow of Japanese yen? A) Import raw materials from Japan denominated in yen to substitute for domestic suppliers. B) Pay suppliers from other countries in yen. C) Import raw materials from Japan denominated in dollars. D) Acquire debt denominated in yen. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 132 Copyright 2010 Pearson Education, Inc. ! 6) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy is referred to as ________. A) a natural hedge. B) currency-switching. C) matching. D) diversification. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 7) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as ________. A) a natural hedge B) currency-switching C) matching D) diversification Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 8) A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________. A) risk-sharing B) currency-switching C) matching D) a natural hedge Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 9) A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time. A) natural hedge loan B) forward loan C) currency switch loan D) back-to-back loan Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 133 Copyright 2010 Pearson Education, Inc. ! 10) A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary. A) indirect; U.S.; Canadian B) indirect; Canadian; U.S. C) direct; U.S.; Canadian D) direct; Canadian; U.S. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 11) Which of the following is NOT an important impediment to widespread use of parallel loans? A) Difficulty in finding an appropriate counterparty. B) The risk that one of the parties will fail to return the borrowed funds when agreed. C) The process does not avoid exchange rate risk. D) All of the above are significant impediments. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 12) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet. A) forward loan B) currency hedge C) counterparty D) currency swap Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 13) A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts. A) matched flow B) currency swap C) back-to-back loan D) none of the above Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 134 Copyright 2010 Pearson Education, Inc. ! 14) A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms? A) The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars. B) The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The British firm pays pounds to the swap dealer and receives dollars. C) The British firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars. D) The British firm pays dollars to a swap dealer and receives dollars from the dealer. The U.S. firm pays pounds to the swap dealer and receives pounds. Register to View AnswerDiff: 3 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 15) Reinvoicing centers provide the following benefits: A) Aid in the management of foreign exchange exposure. B) Effectively guarantee the exchange rate for future orders. C) Help manage intra-subsidiary cash flows. D) all of the above Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 16) Which of the following is NOT seen as a potential disadvantage to the formation of an intracompany reinvoicing center? A) Reinvoicing center personnel may develop expertise in the selection and implementation of foreign exchange hedging techniques. B) The company must create an additional corporate unit. C) Initial setup costs may be high. D) A separate set of books must be kept for this new corporate division. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 135 Copyright 2010 Pearson Education, Inc. ! 17) The Land's Beginning Company Inc. (LBC), imports extreme condition outdoor wear and equipment from The Hudson Bay Company (HBC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar LBC is finding a continued relationship with HBC to be an increasingly difficult proposition. In response to LBC's request, HBC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) LBC will pay at the base rate. Any rate outside of the 5% range, HBC will share equally with LBC the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20? A) C$1.205/$ - C$1.195/$ B) C$1.15/$ - C$1.25/$ C) C$1.14/$ - C$1.26/$ D) none of the above Register to View AnswerDiff: 3 Topic: 12.3 Proactive Management of Operating Exposure Skill: Analytical 18) The Land's Beginning Company Inc. (LBC), imports extreme condition outdoor wear and equipment from The Hudson Bay Company (HBC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar LBC is finding a continued relationship with HBC to be an increasingly difficult proposition. In response to LBC's request, HBC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) LBC will pay at the base rate. Any rate outside of the 5% range, HBC will share equally with LBC the difference between the spot rate and the base rate. If LBC has a payable of C$100,000 due today and the current spot rate is C$1.17/$, how much does LBC owe in U.S. dollars? A) $83,333 B) $85,470 C) $85,837 D) $117,000 Register to View AnswerDiff: 3 Topic: 12.3 Proactive Management of Operating Exposure Skill: Analytical T r u e/ F a l se 1) Currency swaps are exclusively for periods of time under one year. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 136 Copyright 2010 Pearson Education, Inc. ! 2) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 3) Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 4) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 5) Swap agreements are treated as line items on the balance sheet via U.S. accounting methods. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 6) After being introduced in the 1980s, currency swaps have remained a relatively insignificant financial derivative instrument. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 7) After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments. Register to View AnswerDiff: 1 Topic: 12.3 Proactive Management of Operating Exposure Skill: Recognition 8) Intracompany leads and lags are generally more feasible than comparable intercompany activities because the favorable impact of the lead or lag for one company is the reverse for the other firm. Register to View AnswerDiff: 2 Topic: 12.3 Proactive Management of Operating Exposure Skill: Conceptual 137 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain. Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider: (a) matching currency cash flows (b) risk-sharing agreements (c) back-to-back or parallel loans Answer: Matching currency cash flows requires that the British firm with dollar receivables must establish an equivalent dollar payable. They could do this by borrowing dollars and repaying the loan with the proceeds from the receivables account. Or they could move all or part of their operations to the U.S. so that both receivables and payables would be in U.S. dollars. Risk-sharing agreements are contractual clauses whereby both parties agree to an acceptable range of exchange rates at the time the international sale is made. A spot rate at time of exchange outside of the agreed upon range results in an adjustment made to the actual exchange rate that shares the difference between the spot rate and the acceptable range of exchange rates. Back-to-back loans provide for parent-subsidiary cross border financing without incurring direct currency exposure. For example, using our British and U.S. firms, the British firm could lend pounds to the U.S. subsidiary in Britain at the same time that the U.S. firm lends an equivalent amount of dollars to the British subsidiary in the U.S. Later, the loans would be simultaneously repaid. Diff: 3 Topic: 12.3 Proactive Management of Operating Exposure Skill: Analytical 12.4 Contractual Approaches: Hedging the Unhedgeable M u l t i p l e C hoi c e 1) Costs associated with the purchase of sizeable put options positions include each of the following EXCEPT: A) the purchase price of the options. B) the opportunity cost of buying the options rather than diversifying operations to reduce risk. C) executive salaries of having corporate offices in more than one country. D) none of the above Register to View AnswerDiff: 2 Topic: 12.4 Contractual Approaches: Hedging the Unhedgeable Skill: Recognition 138 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) The empirical evidence strongly supports the proposition that contractual hedges can effectively eliminate operating exposure. Register to View AnswerDiff: 2 Topic: 12.4 Contractual Approaches: Hedging the Unhedgeable Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 13 T r a n sl a t ion E x p osu r e 13.1 Overview of Translation M u l t i p l e C hoi c e 1) Translation exposure may also be called ________ exposure. A) transaction B) operating C) accounting D) currency Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Recognition 2) ________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction. A) Transaction B) Operating C) Currency D) Translation Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Recognition 3) Translation exposure measures A) changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. B) the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. C) an unexpected change in exchange rates impact on short run expected cash flows. D) none of the above Register to View AnswerDiff: 2 139 Copyright 2010 Pearson Education, Inc. ! Topic: 13.1 Overview of Translation Skill: Recognition4) According to your authors, the main purpose of translation is A) to prepare consolidated financial statements. B) to help management assess the performance of foreign subsidiaries. C) to act as an interpreter for managers without foreign language skills. D) none of the above Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Recognition 5) Historical exchange rates may be used for ________, while current exchange rates may be used for ________. A) fixed assets and current assets; income and expense items B) equity accounts and fixed assets; current assets and liabilities C) current assets and liabilities; equity accounts and fixed assets D) equity accounts and current liabilities; current assets and fixed assets Register to View AnswerDiff: 2 Topic: 13.1 Overview of Translation Skill: Conceptual 6) If an imbalance results from the accounting method used for translation, the imbalance is taken either to ________ or ________. A) the bank; the post office. B) depreciation; the market for foreign exchange swaps. C) current income; equity reserves. D) current liabilities; equity reserves. Register to View AnswerDiff: 2 Topic: 13.1 Overview of Translation Skill: Conceptual 7) Generally speaking, translation methods by country define the translation process as a function of what two factors? A) size; location B) a firm's functional currency; location C) location; foreign subsidiary independence D) foreign subsidiary independence; a firm's functional currency Register to View AnswerDiff: 2 Topic: 13.1 Overview of Translation Skill: Recognition 140 Copyright 2010 Pearson Education, Inc. ! 8) A/an ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent. A) self-sustaining foreign B) integrated foreign entity C) foreign D) none of the above Register to View AnswerDiff: 2 Topic: 13.1 Overview of Translation Skill: Recognition 9) Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity. A) domestic; integrated B) self-sustaining; domestic C) integrated; self-sustaining D) self-sustaining; integrated Register to View AnswerDiff: 2 Topic: 13.1 Overview of Translation Skill: Conceptual 10) A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations. A) local B) integrated C) notational dollar D) functional Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Recognition 11) The ________ determines accounting policy for U.S. firms. A) Securities and Exchange Commission (SEC) B) Federal Reserve System (Fed) C) Financial Accounting Standards Board (FASB) D) General Agreement on Tariffs and Trade (GATT) Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Recognition 141 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) It is possible to use different exchange rates for different line items on a financial statement. Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Conceptual 2) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring. Register to View AnswerDiff: 1 Topic: 13.1 Overview of Translation Skill: Conceptual 13.2 Translation Methods M u l t i p l e C hoi c e 1) The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method. A) current rate; temporal B) temporal; proper timing C) current rate; future rate D) none of the above Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Recognition 2) Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________. A) consolidated statement of cash flow B) consolidated income statement C) consolidated balance sheet D) none of the above Register to View AnswerDiff: 1 Topic: 13.2 Translation Methods Skill: Recognition 142 Copyright 2010 Pearson Education, Inc. ! 3) The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement. A) monetary; current rate B) temporal; current rate C) temporal; monetary D) current rate; temporal Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Conceptual 4) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, A) translation is accomplished through the current rate method. B) translation is accomplished through the temporal method. C) translation is not required. D) the translation method to be used is not obvious. Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Conceptual 5) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the local currency is the functional currency, then A) the translation method to be used is not obvious. B) translation is accomplished through the temporal method. C) translation is not required. D) translation is accomplished through the current rate method. Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Conceptual 6) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the U.S. dollar is the functional currency, then A) translation is not required. B) translation is accomplished through the current rate method. C) translation is accomplished through the temporal method. D) none of the above Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Conceptual 143 Copyright 2010 Pearson Education, Inc. ! ,>'T2'18)'J$/#;)04'5$(53&30/N'#2'0'U+M+'23/G'805'4)1'):;#5)&'055)15'#2'!Q--6---6'04&'18)')$/#' drops in value from $1.40/euro to *E+R-.!'18)'U+M+'23/G'805'0'1/045%013#4'VVVVVVVV+ A) gain of $50,000 B) loss of $50,000 C) gain of $450,000 C>'%#55'#2'!OQ-6--Register to View AnswerDiff: 3 Topic: 13.2 Translation Methods Skill: Analytical 8) If the European subsidiary of a U.S. firm has net exp#5)&'055)15'#2'!Q--6---6'04&'18)')$/#' 34</)05)5'34'W0%$)'2/#G'*E+R-.!'1#'*E+RQ.!'18)'U+M+'23/G'805'0'1/045%013#4'VVVVVVVV+ A) gain of $25,000 B) loss of $25,000 C) gain of $525,000 C>'%#55'#2'!QDQ6--Register to View AnswerDiff: 3 Topic: 13.2 Translation Methods Skill: Analytical 9) If the British subsidiary of a European firm has net exposed assets of 250,000, and the pound 34</)05)5'34'W0%$)'2/#G'E+O-.P'1#'!E+OQ.P6'18)'J$/#;)04'23/G'805'0'1/045%013#4'VVVVVVVV+ =>'K034'#2'!DQ6--@>'%#55'#2'!DQ6--C) gain of 25,000 D) loss of 25,000 Register to View AnswerDiff: 3 Topic: 13.2 Translation Methods Skill: Analytical 10) If the British subsidiary of a European firm has net exposed assets of 250,000, and the ;#$4&'&/#;5'34'W0%$)'2/#G'!E+O-.P'1#')$/#'E+R-.P6'18)'J$/#;)04'23/G'has a translation ________. =>'K034'#2'!ED6Q-@>'%#55'#2'!ED6Q-C) loss of 12,500 D) gain of 12,500 Register to View AnswerDiff: 3 Topic: 13.2 Translation Methods Skill: Analytical 144 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not. Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Recognition 2) The current rate method is the most prevalent method today for the translation of financial statements. Register to View AnswerDiff: 1 Topic: 13.2 Translation Methods Skill: Recognition 3) The temporal rate method is the most prevalent method today for the translation of financial statements. Register to View AnswerDiff: 1 Topic: 13.2 Translation Methods Skill: Recognition 4) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement. Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Recognition 5) Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation. Register to View AnswerDiff: 1 Topic: 13.2 Translation Methods Skill: Recognition 6) The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings. Register to View AnswerDiff: 2 Topic: 13.2 Translation Methods Skill: Recognition 145 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each. Answer: The current rate method translates almost all line items from the foreign subsidiary to the parent consolidated statements at the current exchange rate. This is the most commonly used method in the world today. Assets and liabilities are translated at current exchange rate and items found on the income statement are translated at the actual exchange rate on the date of transaction, or as an average over the statement period where appropriate. Equity accounts are translated at historical costs. Any gains or losses caused by translation adjustments are typically placed into a special reserve account (such as a CTA). Thus, gains or losses do not go through the income statement and do not increase the volatility of net income. This is perhaps the biggest advantage to using the current rate method. By contrast, the temporal method assumes that several individual financial statement items are periodically restated to reflect their market value. The temporal method translates individual line items based on monetary/nonmonetary criteria where monetary assets such as cash and marketable securities are translated at current exchange rates, but nonmonetary assets such as fixed assets are translated at historical rates. The gains or losses that result from translation remeasurement are recorded on the consolidated income statement and impact upon the volatility of net income. The temporal method of using historical costs may be more consistent with the practice of carrying domestic items at cost on the financial statements. Diff: 3 Topic: 13.2 Translation Methods Skill: Analytical 13.3 Comparing Translation Exposure with Operating Exposure M u l t i p l e C hoi c e 1) ________ occur as a result of changes in the value of currency whereas ________ occur as a result of ongoing business activities. A) Operating gains or losses; Translation gains or losses B) Swap losses; Translation gains or losses C) Translation gains or losses; Operating gains or losses D) all of the above Register to View AnswerDiff: 2 Topic: 13.3 Comparing Translation Exposure with Operating Exposure Skill: Recognition 146 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Translation gains or losses can be quite different from operating gains or losses not only in magnitude but also in sign. Register to View AnswerDiff: 2 Topic: 13.3 Comparing Translation Exposure with Operating Exposure Skill: Recognition 13.4 Managing Translation Exposure M u l t i p l e C hoi c e 1) The main technique to minimize translation exposure is called a/an ________ hedge. A) balance sheet B) income statement C) forward D) translation Register to View AnswerDiff: 1 Topic: 13.4 Managing Translation Exposure Skill: Recognition 2) A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities A) have a 2:1 ratio of assets to liabilities. B) have a 2:1 ratio of liabilities to assets. C) have a 2:1 ratio of liabilities to equity. D) be equal. Register to View AnswerDiff: 1 Topic: 13.4 Managing Translation Exposure Skill: Conceptual 3) If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then A) the net exposed position is called monetary balance. B) the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) both A and B are true. D) none of the above Register to View AnswerDiff: 2 Topic: 13.4 Managing Translation Exposure Skill: Conceptual 147 Copyright 2010 Pearson Education, Inc. ! 4) If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge? A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized. B) The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits. C) The foreign subsidiary is operating is a hyperinflationary environment. D) All of the above are appropriate reasons to use a balance sheet hedge. Register to View AnswerDiff: 2 Topic: 13.4 Managing Translation Exposure Skill: Conceptual 5) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure. A) maximize translation; no transaction B) eliminate translation; transaction C) maximize transaction; no translation D) eliminate transaction; translation Register to View AnswerDiff: 2 Topic: 13.4 Managing Translation Exposure Skill: Conceptual 6) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a A) 10% foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange gain on the U.S. dollar accounts receivable. C) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded. D) any gain or loss will be recorded only by the parent firm. Register to View AnswerDiff: 2 Topic: 13.4 Managing Translation Exposure Skill: Conceptual 148 Copyright 2010 Pearson Education, Inc. ! 7) ________ gains and losses are "realized" whereas ________ gains and losses are only "paper." A) Translation; transaction B) Transaction; translation C) Translation; operating D) none of the above Register to View AnswerDiff: 2 Topic: 13.4 Managing Translation Exposure Skill: Recognition T r u e/ F a l se 1) It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure. Register to View AnswerDiff: 1 Topic: 13.4 Managing Translation Exposure Skill: Conceptual E ssa y 1) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified. Register to View Answerbalance sheet hedge attempts to equalize the amount of assets and liabilities of a foreign subsidiary exposed to translation risk. Thus, the gain to the firm from a change in exchange rates will be perfectly offset by an equal and opposite loss. Firms may engage in balance sheet hedges under conditions of hyperinflation, or when the subsidiary is about to be liquidated and the value of the CTA account would be realized. The author on page 16 lists other examples. Diff: 3 Topic: 13.4 Managing Translation Exposure Skill: Analytical 149 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 14 T h e G lob a l C ost a n d A v a i l a b i l i t y of C a p i t a l 14.1 Introduction M u l t i p l e C hoi c e 1) If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets. A) liquid; segmented B) liquid; large C) illiquid; segmented D) large; illiquid Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition 2) Other things equal, a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a ________. A) relatively low cost of capital B) relatively high cost of capital C) relatively average cost of capital D) cost of capital that we cannot estimate from this question Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition 3) Relatively high costs of capital are more likely to occur in ________. A) highly illiquid domestic securities markets B) highly liquid domestic securities markets C) unsegmented domestic securities markets D) none of the above Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition 150 Copyright 2010 Pearson Education, Inc. ! 4) Reasons that firms may find themselves with relatively high costs of capital include: A) The firms reside in emerging countries with undeveloped capital markets. B) The firms are too small to easily gain access to their own national securities market. C) The firms are family owned and they choose not to access public markets and lose control of the firm. D) all of the above Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition 5) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) Excessive regulatory control. B) Perceived political risk. C) Anticipated foreign exchange risk. D) All of the above are contributing factors. Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition 6) Which of the following is NOT a contributing factor to the segmentation of capital markets? A) Lack of transparency. B) Asymmetric availability of information. C) Insider trading. D) All of the above are contributing factors. Register to View AnswerDiff: 2 Topic: 14.1 Introduction Skill: Recognition T r u e/ F a l se 1) A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other, unsegmented markets. Register to View AnswerDiff: 1 Topic: 14.1 Introduction Skill: Recognition 151 Copyright 2010 Pearson Education, Inc. ! 14.2 Weighted Average Cost of Capital M u l t i p l e C hoi c e 1) The weighted average cost of capital (WACC) is A) the required rate of return for all of a firm's capital investment projects. B) the required rate of return for a firm's average risk projects. C) not applicable for use by MNE. D) equal to 13%. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 2) The capital asset pricing model (CAPM) is an approach A) to determine the price of equity capital. B) used by marketers to determine the price of saleable product. C) can be applied only to domestic markets. D) none of the above Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 3) Which of the following is NOT a key variable in the equation for the capital asset pricing model? A) The risk-free rate of interest. B) The expected rate of return on the market portfolio. C) The marginal tax rate. D) All are important components of the CAPM. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 4) ________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market. A) Systematic B) Unsystematic C) Total D) Diversifiable Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 152 Copyright 2010 Pearson Education, Inc. ! 5) Systematic risk A) is the standard deviation of a security's return. B) is measured with beta. C) is measured with standard deviation. D) none of the above Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 6) Which of the following is generally unnecessary in measuring the cost of debt? A) a forecast of future interest rates B) the proportions of the various classes of debt a firm proposes to use C) the corporate income tax rate D) All of the above are necessary for measuring the cost of debt. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 7) The after-tax cost of debt is found by A) dividing the before-tax cost of debt by (1 - the corporate tax rate). B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt. C) multiplying the before-tax cost of debt by (1 - the corporate tax rate). D) subtracting the corporate tax rate from the before-tax cost of debt. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 8) A firm whose equity has a beta of 1.0 A) has greater systematic risk than the market portfolio. B) stands little chance of surviving in the international financial market place. C) has less systematic risk than the market portfolio. D) None of the above is true. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 153 Copyright 2010 Pearson Education, Inc. ! 9) The difference between the expected (or required) return for the market portfolio and the riskfree rate of return is referred to as ________. A) beta B) the geometric mean C) the market risk premium D) the arithmetic mean Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 10) In general the geometric mean will be ________ the arithmetic mean for a series of returns. A) less than B) greater than C) equal to D) greater than or equal to Register to View AnswerDiff: 1 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition 11) The beginning share price for a security over a three-year period was $50. Subsequent yearend prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was A) 9.30% and 8.58% respectively. B) 9.30% and 7.89% respectively. C) 9.30% and 7.03% respectively. D) 9.30% and 6.37% respectively. Register to View AnswerDiff: 3 Topic: 14.2 Weighted Average Cost of Capital Skill: Analytical 12) If a company fails to accurately predict it's cost of equity, then A) the firm's wacc will also be inaccurate. B) the firm may not be using the proper interest rate to estimate NPV. C) the firm my incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 154 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Other things equal, an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 2) If a firm's expected returns are more volatile than the expected return for the market portfolio, it will have a beta less than 1.0. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 3) The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Conceptual 4) One of the elegant beauties of international equity markets is that over the last 100 or so years, the average market risk premium is almost identical across major industrial countries. Register to View AnswerDiff: 2 Topic: 14.2 Weighted Average Cost of Capital Skill: Recognition E ssa y 1) What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm? Answer: The WACC considers the proportion or weight of assets financed with debt and the proportion financed with equity. It also looks at the costs of debt and equity financing and the firm's corporate tax rate. The difficulty of such a computation is compounded for an MNE because there are several additional sources of debt financing with different required rates of return and tax rates for an MNE than for a domestic firm. Also, equity may be sourced in several different markets and subject to several different regulations of several different countries. Adding regulatory oversight, multiple sourcing locations, and differing investor expectations may significantly complicate the process of determining an MNE's cost of capital. Diff: 3 Topic: 14.2 Weighted Average Cost of Capital Skill: Analytical 155 Copyright 2010 Pearson Education, Inc. ! 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors M u l t i p l e C hoi c e 1) The primary goal of both domestic and international portfolio managers is A) to maximize return for a given level of risk, or minimize risk for a given level of return. B) minimize the number of unique securities held in their portfolio. C) maximize their WACC. D) all of the above Register to View AnswerDiff: 1 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Conceptual 2) Which of the following is NOT a portfolio diversification technique used by portfolio managers? A) Diversify by type of security. B) Diversify by the size of capitalization of the securities held. C) Diversify by country. D) All of the above are diversification techniques. Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 3) If all capital markets are fully integrated, securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for ________. A) time of day and language requirements B) political risk and time lags C) foreign exchange risk and political risk D) foreign exchange risk and the spot rate Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 4) Capital market segmentation is a financial market imperfection caused mainly by ________. A) government constraints B) institutional practices C) investor perceptions D) all of the above Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 156 Copyright 2010 Pearson Education, Inc. ! 5) Capital market imperfections leading to financial market segmentation include A) asymmetric information between domestic and foreign-based investors. B) high securities transaction costs. C) foreign exchange risks. D) all of the above Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 6) Capital market imperfections leading to financial market segmentation include A) political risks. B) corporate governance differences. C) regulatory barriers. D) all of the above Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 7) The authors refer to companies that have access to a ________ as MNEs, and firms without such access are identified as ________. A) global cost and availability of capital; domestic firms. B) large domestic capital market; geographically challenged. C) world financial markets; antiquated. D) none of the above Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 8) The MNE can ________ its ________ by gaining access to markets that are more liquid and/or less segmented than its own. A) increase; MCC B) decrease; MCC C) maintain; MRR D) none of the above Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 157 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Internationally diversified portfolios often have a lower rate of return and almost always have a higher level of portfolio risk than their domestic counterparts. Register to View AnswerDiff: 2 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Conceptual 2) Empirical tests of market efficiency fail to show that most major national markets are reasonably efficient. Register to View AnswerDiff: 1 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Recognition 3) A MNEs marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms. Register to View AnswerDiff: 1 Topic: 14.3 The Demand for Foreign Securities: The Role of International Portfolio Investors Skill: Conceptual 14.4 The Cost of Capital for MNEs Compared to Domestic Firms M u l t i p l e C hoi c e 1) Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally. A) equity ratios B) debt ratios C) temperatures D) none of the above Register to View AnswerDiff: 2 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 158 Copyright 2010 Pearson Education, Inc. ! 2) According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because A) of a lack of competition among international firms. B) of an offset to cash flow variability caused by exchange rate variability. C) returns are not perfectly correlated between countries. D) none of the above Register to View AnswerDiff: 2 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 3) Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms? A) MNEs tend to rely more on short and intermediate term debt. B) MNEs have greater foreign exchange risk. C) MNEs have greater costs of asymmetric information. D) MNEs have higher agency costs. Register to View AnswerDiff: 2 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 4) Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts. This could be due to A) the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm. B) the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm. C) the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like. D) none of the above. Systematic risk is less for MNEs than for their domestic counterparts. Register to View AnswerDiff: 2 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 5) The optimal capital budget A) occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects. B) is typically larger for purely domestic firms than for MNEs. C) is an illusion found only in international finance textbooks. D) none of the above Register to View AnswerDiff: 1 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 159 Copyright 2010 Pearson Education, Inc. ! 6) Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of ________. A) political risk B) exchange rate risk C) agency costs D) all of the above Register to View AnswerDiff: 2 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition T r u e/ F a l se 1) Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms. Register to View AnswerDiff: 1 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition 2) The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches. Register to View AnswerDiff: 1 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Recognition E ssa y 1) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts? Answer: In theory, MNEs should be able to support greater amounts of debt due to reduced variability of cash flows brought about by diversification across countries. And, because of this reduced risk borne by MNEs, they should also have a lower cost of capital. However, empirical research finds that domestic firms tend to use greater amounts of short and intermediate debt than do MNEs and that the cost of capital is greater for MNEs due to increased agency costs, political risk, exchange rate risk, and asymmetric information. Diff: 3 Topic: 14.4 The Cost of Capital for MNEs Compared to Domestic Firms Skill: Conceptual 160 Copyright 2010 Pearson Education, Inc. ! 14.5 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than Their Domestic Counterparts? M u l t i p l e C hoi c e 1) Empirical studies indicate that WACC for an MNE is higher than for their domestic competitors. Reasons cited for this increased cost include all of the following EXCEPT: A) agency costs. B) foreign exchange risk. C) political risk. D) All of the above are cited as reasons for an MNE's increased WACC. Register to View AnswerDiff: 2 Topic: 14.5 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than Their Domestic Counterparts? Skill: Recognition T r u e/ F a l se 1) Empirical studies indicate that MNEs have a lower debt/capital ratio than domestic counterparts, indicating that MNEs have a lower cost of capital. Register to View AnswerDiff: 2 Topic: 14.5 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than Their Domestic Counterparts? Skill: Recognition 161 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 15 Sou r c i n g E q u i t y G lob a l l y 15.1 Designing a Strategy to Source Equity Globally M u l t i p l e C hoi c e 1) The choice of when and how to source equity globally is usually aided early on by the advice of A) an investment banker. B) your stock broker. C) a commercial banker. D) an underwriter. Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 2) Investment banking services include which of the following? A) advising when a security should be cross-listed B) preparation of stock prospectuses C) help to determine the price of the issue D) all of the above Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 3) Which of the following is the typical order of sourcing capital abroad? A) An international bond issue, then cross listing the outstanding issues on other exchanges, then an international bond issue in the target market. B) An international bond issue in the target market then cross listing the outstanding issues on other exchanges, then an international bond issue. C) An international bond issue, then an international bond issue in the target market, then cross listing the outstanding issues on other exchanges. D) Cross listing the outstanding issues on other exchanges, then an international bond issue, then an international bond issue in the target market. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 162 Copyright 2010 Pearson Education, Inc. ! 4) ________ are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank. A) Negotiable CDs B) International mutual funds C) Depositary receipts D) Eurodeposits Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 5) Depositary receipts traded outside the United States are called ________ depositary receipts. A) Euro B) Global C) American D) none of the above Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 6) Each ADR represents ________ of the shares of the underlying foreign stock. A) a multiple B) 100 C) 1 D) ADRs have nothing to do with foreign stocks. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 7) Which of the following is NOT an advantage of ADRs to U.S. shareholders? A) Transfer of ownership is done in the U.S. in accordance with U.S. laws. B) In the event of the death of the shareholder, the estate does not go through a foreign court. C) Settlement for trading is generally faster in the United States. D) All of the above are advantages of ADRs. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 163 Copyright 2010 Pearson Education, Inc. ! 8) ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are ________. A) facilitated B) unfacilitated C) sponsored D) unsponsored Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 9) Who pays the costs of creating a sponsored ADR? A) the foreign firm whose stocks underlie the ADR B) the U.S. bank creating the ADR C) both the U.S. bank and the foreign firm D) the SEC since they require the regulation Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 10) Level I ADRs trade primarily A) on the New York Stock Exchange. B) on the American Stock Exchange. C) over the counter or pink sheets. D) Level I ADRs typically do not trade at all, but instead are privately issued and held until maturity. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 11) Level II ADRs must meet A) U.S. GAAP standards. B) home country accounting standards. C) both U.S. GAAP and home country standards. D) none of the above Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 164 Copyright 2010 Pearson Education, Inc. ! 12) Level ________ is the easiest standard to satisfy for issuing ADRs. A) 144a B) III C) II D) I Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 13) Level III ADR commitment applies to A) firms that want to list existing shares on the NYSE. B) banks issuing foreign mutual funds. C) ADR issues of under $25,000. D) the sale of a new equity issued in the United States. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 14) By cross listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish which of the following? A) Improve the liquidity of its existing shares. B) Increase its share price. C) Increase the firm's visibility. D) all of the above Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual T r u e/ F a l se 1) Most firms raise their initial capital in foreign markets. Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 2) ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage cannot keep the prices in line with the foreign price of the stock. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 165 Copyright 2010 Pearson Education, Inc. ! 3) An unsponsored ADR may be initiated without the approval of the foreign firm with the underlying stock. Register to View AnswerDiff: 1 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Recognition 4) ADRs are considered an effective way for firms to improve the liquidity of their stock, especially if the home market is small and illiquid. Register to View AnswerDiff: 2 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual E ssa y 1) ADRs are a popular investment tool for many U.S. investors. In recent years several alternatives for investing in foreign equity securities have become available for U.S. investors, yet ADRs remain popular. Define what an ADR is and provide at least three examples of the advantages they may hold over alternative foreign investment vehicles for U.S. investors. Answer: Depositary receipts are negotiable certificates issued by a bank to represent the underlying shares of stock held in trust at a foreign custodian bank. Those receipts traded in the U.S. and denominated in dollars are called American depositary receipts (ADR). Because ADRs can be exchanged for the underlying foreign security, arbitrage keeps the prices in line. Even though U.S. investors can invest directly into some foreign equity markets, ADRs do offer some technical advantages. Among those advantages are that dividends are received in dollars rather than a foreign currency, ADRs are in registered form rather than bearer form, transfer of ownership is done in accordance with U.S. laws, and in the event of death, probate is in the U.S. and not abroad. Taxes are easier, trading costs are typically lower, and settlement is also faster. Diff: 3 Topic: 15.1 Designing a Strategy to Source Equity Globally Skill: Conceptual 15.2 Foreign Equity Listing and Issuance M u l t i p l e C hoi c e 1) The stock exchange with the greatest value of shares traded is ________. A) NYSE B) Tokyo C) Nasdaq D) London Register to View AnswerDiff: 1 Topic: 15.2 Foreign Equity Listing and Issuance Skill: Recognition 166 Copyright 2010 Pearson Education, Inc. ! 2) The number of foreign firms traded on the London exchange is ________ than the number traded on the NYSE, and the costs of listing and disclosure in London are ________ those for the NYSE. A) less than; less than B) less than; greater than C) greater than; less than D) greater than; greater than Register to View AnswerDiff: 2 Topic: 15.2 Foreign Equity Listing and Issuance Skill: Recognition T r u e/ F a l se 1) The Tokyo exchange is the number one choice of firms looking to gain liquidity by crosslisting their equity securities. Register to View AnswerDiff: 1 Topic: 15.2 Foreign Equity Listing and Issuance Skill: Recognition 2) The least liquid stock markets as identified by the authors offer little liquidity for their own domestic firms, and are of little value to foreign firms. Register to View AnswerDiff: 1 Topic: 15.2 Foreign Equity Listing and Issuance Skill: Conceptual 15.3 Effect of Cross-Listing and Equity Issuance on Share Price M u l t i p l e C hoi c e 1) Your authors note several empirical studies that have found A) no share price effect for foreign firms that cross-list on major U.S. exchanges. B) a positive share price effect for foreign firms that cross-list on major U.S. exchanges. C) a negative share price effect for foreign firms that cross-list on major U.S. exchanges. D) none of the above Register to View AnswerDiff: 2 Topic: 15.3 Effect of Cross-Listing and Equity Issuance on Share Price Skill: Recognition 167 Copyright 2010 Pearson Education, Inc. ! 2) Empirical evidence shows that new issues of equity by domestic firms in the U.S. market typically has a ________ stock price reaction and new equity issues in the U.S. markets by foreign firms with segmented domestic markets have a ________ stock price reaction. A) negative; negative B) positive; negative C) negative; positive D) positive; positive Register to View AnswerDiff: 2 Topic: 15.3 Effect of Cross-Listing and Equity Issuance on Share Price Skill: Conceptual 3) In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity? A) enhance a firm's local image B) become more familiar with the local financial community C) get better local press coverage D) all of the above Register to View AnswerDiff: 2 Topic: 15.3 Effect of Cross-Listing and Equity Issuance on Share Price Skill: Conceptual T r u e/ F a l se 1) The combined impact of a new equity issue undertaken simultaneously with a cross-listing has a more favorable impact on stock price than cross-listing alone. Register to View AnswerDiff: 1 Topic: 15.3 Effect of Cross-Listing and Equity Issuance on Share Price Skill: Recognition 15.4 Barriers to Cross-Listing and Selling Equity Abroad M u l t i p l e C hoi c e 1) Another school of thought about the worldwide trend toward fuller and more standardized disclosure rules is that the cost of U.S. level equity capital disclosure A) chases away potential listers of equity. B) is an onerous costly burden. C) leads to fewer foreign firms cross listing in U.S. equity markets. D) all of the above Register to View AnswerDiff: 2 Topic: 15.4 Barriers to Cross-Listing and Selling Equity Abroad Skill: Recognition 168 Copyright 2010 Pearson Education, Inc. ! 2) According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital. A) increase B) decrease C) have no impact on D) none of the above Register to View AnswerDiff: 2 Topic: 15.4 Barriers to Cross-Listing and Selling Equity Abroad Skill: Recognition 3) For the most part, U.S. SEC disclosure requirements are ________ stringent than other, nonU.S. equity market rules. A) more B) less C) as equally D) none of the above Register to View AnswerDiff: 1 Topic: 15.4 Barriers to Cross-Listing and Selling Equity Abroad Skill: Recognition T r u e/ F a l se 1) Because of stringent SEC rules, American companies typically do not find foreign disclosure rules to be overly onerous.. Register to View AnswerDiff: 1 Topic: 15.4 Barriers to Cross-Listing and Selling Equity Abroad Skill: Conceptual E ssa y 1) What are the two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Explain which school of thought you hold to and why. Answer: The student must give his/her own opinion and supporting background. In either case the following should be noted: Increased disclosure should decrease uncertainty thus increasing stock price. However, increased disclosure requirements result in increased costs in the form of initial preparation of financial statements, on-going costs associated with regular development of financial statements, and the costs of gathering and distributing information about the form on an on-going basis. As the authors state, disclosure is a two-edged sword. Diff: 3 Topic: 15.4 Barriers to Cross-Listing and Selling Equity Abroad Skill: Analytical 169 Copyright 2010 Pearson Education, Inc. ! 15.5 Alternative Instruments to Source Equity in Global Markets M u l t i p l e C hoi c e 1) Which of the following were NOT identified by the authors as an alternative instrument to source equity in global markets? A) Sale of a directed public share issue to investors in a target market. B) Private placements under SEC rule 144a. C) Sale of shares to private equity funds. D) All of the above are alternatives to source equity instruments. Register to View AnswerDiff: 2 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Recognition 2) A ________ is defined as one that is targeted at investors in a single country and underwritten in whole or part by investment institutions from that country. A) SEC rule 144a placement B) directed public share issue C) Euroequity public issue D) strategic alliance Register to View AnswerDiff: 2 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Recognition 3) The term "euro" as used in the euro equity market implies A) the issuers are located in Europe. B) the investors are located in Europe. C) both A and B D) none of the above Register to View AnswerDiff: 2 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Recognition 4) Private equity funds (PEF) differ from traditional venture capital (VC) funds in that A) VC operate mainly in lesser-developed countries while PEF do not. B) VC typically invest in family business whereas PEF do not. C) VC is almost unavailable to emerging markets while PEF capital is available. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Conceptual 170 Copyright 2010 Pearson Education, Inc. ! 5) Strategic alliances are normally formed by firms that expect to gain synergies from which of the following? A) Economies of scale. B) Economies of scope. C) Complementary marketing. D) all of the above Register to View AnswerDiff: 2 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Conceptual T r u e/ F a l se 1) SEC rule 144A permits institutional buyers to trade privately placed securities without the previous holding periods restrictions and without requiring SEC registration. Register to View AnswerDiff: 1 Topic: 15.5 Alternative Instruments to Source Equity in Global Markets Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 16 Sou r c i n g D e b t G lob a l l y 16.1 Optimal Financial Structure M u l t i p l e C hoi c e 1) Which financial economists are most closely associated with the financial theory of optimal capital structure? A) Modigliani and Miller B) Fama, Fisher, Jensen, and Roll C) Black and Scholes D) Markowitz and Sharpe Register to View AnswerDiff: 1 Topic: 16.1 Optimal Financial Structure Skill: Recognition 2) For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________. A) decreases; increases. B) decreases; decreases. C) increases; increases. D) increases; decreases. Register to View AnswerDiff: 2 171 Copyright 2010 Pearson Education, Inc. ! Topic: 16.1 Optimal Financial Structure Skill: Conceptual 3) One of the most important factors in making debt less expensive than equity is A) the tax deductibility of depreciation. B) the tax deductibility of equity. C) the tax deductibility of dividends. D) the tax deductibility of interest. Register to View AnswerDiff: 2 Topic: 16.1 Optimal Financial Structure Skill: Recognition 172 Copyright 2010 Pearson Education, Inc. ! 4) One of the most important factors in making debt less expensive than equity is A) the seniority of equity obligations to debt claims. B) the tax deductibility of dividends. C) the tax deductibility of equity. D) the seniority of debt obligations to equity claims. Register to View AnswerDiff: 2 Topic: 16.1 Optimal Financial Structure Skill: Recognition 5) Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing? A) Increased agency costs. B) Increased probability of financial distress (bankruptcy) due to fixed interest payments. C) Alternative tax shields to those supplied by interest payments. D) All of the above offset the tax advantage of debt as a source of financing. Register to View AnswerDiff: 2 Topic: 16.1 Optimal Financial Structure Skill: Recognition 6) Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________. A) point; 50% B) point; 25% C) range; 30%-60% D) range; 10%-40% Register to View AnswerDiff: 2 Topic: 16.1 Optimal Financial Structure Skill: Recognition 7) Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include A) the industry in which it operates. B) the volatility of its sales and operating income. C) the collateral value of its assets. D) all of the above Register to View AnswerDiff: 2 Topic: 16.1 Optimal Financial Structure Skill: Recognition 173 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Financial theory has at last provided us with a single optimal capital structure for domestic firms. Register to View AnswerDiff: 1 Topic: 16.1 Optimal Financial Structure Skill: Conceptual 2) Financial practice suggests that there is a range for an optimal capital structure for a firm within an industry rather than a specific optimal ratio of debt to equity. Register to View AnswerDiff: 1 Topic: 16.1 Optimal Financial Structure Skill: Conceptual 16.2 Optimal Financial Structure and the MNE M u l t i p l e C hoi c e 1) MNEs situated in countries with small illiquid and segmented markets are most like A) small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing. B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing. C) small domestic U.S. firms in that they have a strong niche market in the U.S. D) None of the above is true. Register to View AnswerDiff: 2 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Conceptual 2) In theory, the MNE should support ________ debt ratios than a purely domestic firm because their cash flows are ________. A) lower; more stable due to international diversification B) lower; less stable due to international diversification C) higher; more stable due to international diversification D) higher; less stable due to international diversification Register to View AnswerDiff: 2 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Conceptual 174 Copyright 2010 Pearson Education, Inc. ! 3) TropiKana Inc., a U.S firm, has just borrowed $1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 6.00% per year, how much interest will they pay in the first year? A) $6,000 B) $60,000 C) $600,000 C>'!X-6--Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 4) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40.!'01'18)'13G)'18)'%#04'"05'G0&)'1#'*E+RQ.!'01'18)')4&'#2' the first year, how much interest will TropiKana pay at the end of the first year (rounded)? A) $55,000 @>'!,O6DQC) $74,250 D) $77,000 Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 5) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from *E+O-.!'01'18)'13G)'18)'%#04'"05'G0&)'1#'*E+OQ.!'01'18)')4&'#2' the first year, how much interest will TropiKana pay at the end of the first year (rounded)? A) $55,000 B) $79,750 C) $77,000 D) $37,931 Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 175 Copyright 2010 Pearson Education, Inc. ! 6) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar 2/#G'*E+O-.!'01'18)'13G)'18)'%#04'"05'G0&)'1#'*E+OQ.!'01'18)')4&'#2' the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)? A) $1,529,750 @>'!E6QDY6,QC) $1,055,000 D) $1,477,000 Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 7) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro &);/)<301)5'0K03451'18)'&#%%0/'2/#G'*E+O-.!'01'18)'13G)'18)'%#04'"05'G0&)'1#'*E+RQ.!'01'18)')4&'#2' the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)? A) $1,477,000 B) $1,055,000 B>'!E6ODO6DQD) $1,424,250 Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 8) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro 0;;/)<301)5'0K03451'18)'&#%%0/'2/#G'*E+O-.!'01'18)'13G)'18)'%#04'"05'G0&)'1#'*E+OQ.!'01'18)')4&'#2' the first year, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)? A) 1.73% B) 5.50% C) 10.50% D) 9.27% Register to View AnswerDiff: 3 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Analytical 176 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) The domestic theory of optimal capital structure does not need to be modified for MNEs. Register to View AnswerDiff: 1 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Recognition 2) Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly correlated. The same reasoning is often argued for MNEs diversifying into international markets. Register to View AnswerDiff: 1 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Conceptual 3) A significant advantage of borrowing foreign currency-denominated bonds is that the borrower need not worry about relative changes in the value of the home currency. Register to View AnswerDiff: 1 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Conceptual 4) For firms to raise capital in international markets, it is more important to adhere to capital structure ratios similar to those found in the United States and United Kingdom than to those in the firm's home country. Register to View AnswerDiff: 1 Topic: 16.2 Optimal Financial Structure and the MNE Skill: Recognition 16.3 Financial Structure of Foreign Subsidiaries M u l t i p l e C hoi c e 1) If we accept the MNE objective of minimizing the consolidated cost of capital then A) the subsidiary's cost of capital is relevant only to the extent that it affects this overall goal. B) the objective of minimizing the cost of capital for each individual subsidiary may not be appropriate. C) the value of the MNE as a whole should be maximized. D) all of the above Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Conceptual 177 Copyright 2010 Pearson Education, Inc. ! 2) Of the following, which is NOT identified by the authors as a country-specific environmental variable key to determining debt ratios? A) Historical development. B) Taxation. C) Corporate governance. D) All of the above are key variables identified by the authors. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Recognition 3) Of the following, which is NOT identified by the authors as a country-specific environmental variable key to determining debt ratios? A) Agency costs. B) Government regulations. C) The existence of a viable corporate bond market. D) All of the above are key variables identified by the authors. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Recognition 4) Of the following, which is NOT considered to be an advantage to MNEs of having a financial structure adhere to local debt norms? A) A localized financial structure reduces criticism of foreign subsidiaries that have previously used a different capital structure. B) A localized financial structure helps management evaluate return on equity investment relative to local competitors in the same industry. C) MNE have a competitive advantage over the locals, thus by using the local capital structure, the MNE is even stronger. D) All of the above are noted as advantages to having a localized capital structure. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Recognition 178 Copyright 2010 Pearson Education, Inc. ! 5) Of the following, which is NOT considered to be a disadvantage to MNEs of having a financial structure adhere to local debt norms? A) Why adhere to local standards if, as an MNE, the firm has important competitive advantages relating to capital structure? B) Adhering to local standards may push the MNE consolidated financial ratios out of the optimal range. C) A localized financial structure makes it difficult for management to compare operating results with those of local competitors. D) All of the above are noted as disadvantages to having a localized capital structure. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Recognition 6) The MNE in an effort to minimize the cost of external funds should choose ________ funds to minimize ________. A) internal; debt financing. B) internal; taxes and political risk. C) external; debt financing. D) external; taxes and political risk. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Conceptual 7) Of the following, which is NOT an internal source of financing for the foreign subsidiary? A) Equity in the form of cash from the parent firm. B) Equity in the form of real goods from the parent. C) Debt in the form of loans from the same commercial bank used by the parent. D) All of the above are internal sources of financing for the foreign subsidiary. Register to View AnswerDiff: 2 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Recognition T r u e/ F a l se 1) Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary. Funding from sister subsidiaries are considered external funding. Register to View AnswerDiff: 1 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Conceptual 179 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) There is much debate about whether an MNE should consider individual country norms, known as localization, when attempting to optimize the consolidated capital structure and minimize the firm's cost of capital. Provide arguments for the advantages and disadvantages of localization of capital structure for subsidiaries. Do you think MNEs should localize the capital structure of their subsidiaries? Why/why not? Answer: The authors lay out several advantages and disadvantages to localization. The main advantages include: ! Localization deflects criticism of foreign subsidiaries that have too high a debt ratio that they are not contributing risk capital to the host country, or too low debt ratios that make the subsidiary insensitive to local monetary policy. ! Localization aids in comparisons of ROE and other financial ratios with local competitors. ! Localization is a way for managers to monitor decision-making, ROA, and other profitability ratios. ! The main disadvantages include: ! An MNE is supposed to have comparative advantage over the locals, and better access to international financial markets. Therefore, why should they alter an optimal capital structure just to "fit in"? ! Capital structure optimization of the parts does not necessarily imply optimization of the whole. ! The debt ratio of each subsidiary is really a reflection of the parent firm as a whole. ! At this point, the students needs to decide which argument they think is stronger and explain their reasoning. Diff: 3 Topic: 16.3 Financial Structure of Foreign Subsidiaries Skill: Analytical 16.4 International Debt Markets M u l t i p l e C hoi c e 1) ________ are domestic currencies of one country on deposit in a second country. A) LIBORs B) Eurocurrencies C) Federal funds D) Discount window deposits Register to View AnswerDiff: 1 Topic: 16.4 International Debt Markets Skill: Recognition 180 Copyright 2010 Pearson Education, Inc. ! 2) Of the following, which was NOT cited by the authors as a valuable function provided by the Eurocurrency market? A) Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity. B) Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the U.S. dollar. C) The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs. D) All of the above were cited by the authors. Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Recognition 3) Eurobanks are A) banks where Eurocurrencies are deposited. B) major world banks that conduct a Eurocurrency business in addition to normal banking activities. C) financial intermediaries that simultaneously bid for time deposits in and make loans in a currency other than that of the currency of where it is located. D) All of the above are descriptions of a Eurobank. Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Recognition 4) Eurocredits are A) bank loans to MNEs and others denominated in a currency other than that of the country where the bank is located. B) typically variable rate and tied to the LIBOR. C) usually for maturities of six months or less. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Conceptual 5) In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs? A) Commercial paper. B) Euro-Medium-Term notes (EMTNs). C) The international bond market. D) all of the above Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Recognition 181 Copyright 2010 Pearson Education, Inc. ! 6) Foreign bonds sold in the United States are nicknamed "Yankee bonds," foreign bonds sold in Japan are called "Samurai bonds." What are foreign bonds sold in the United Kingdom nicknamed? A) "Union Jacks" B) "Royalty" C) "Bulldogs" D) "Churchill's" Register to View AnswerDiff: 1 Topic: 16.4 International Debt Markets Skill: Recognition 7) A ________ is a bond underwritten by a syndicate from a single country, sold within in that country, denominated in that country's currency, but the issuer is from outside that country. A) foreign bond B) Eurobond C) domestic bond D) none of the above Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Recognition T r u e/ F a l se 1) Eurocurrencies are NOT the same as the euro developed for the common European currency. Register to View AnswerDiff: 1 Topic: 16.4 International Debt Markets Skill: Recognition 2) The Eurocurrency market continues to thrive because it is a large international money market relatively free of governmental regulation and interference. Register to View AnswerDiff: 1 Topic: 16.4 International Debt Markets Skill: Recognition 3) Moody's rates international bonds at the request of the issuer with the stipulation that Moody's will publish the ratings even if the ratings are unfavorable. Register to View AnswerDiff: 2 Topic: 16.4 International Debt Markets Skill: Recognition 182 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) The Euro-medium-term-note (EMTN) has filled a substantial niche market in global financing. What are the distinguishing characteristics of the EMTN and why is it such a popular form of financing for MNEs? Answer: EMTNs have maturity between the long-lived international bonds and the short-term Euro-commercial paper, thus they have an appealing time horizon to many investors. EMTNs are like international bonds in that they pay periodic interest. The distinguishing features of an EMTN are: They are similar to a shelf registration in that the entire order for the securities does not have to be issued on the same day. Coupon payments are paid continuously, and the relatively small denominations allow for some flexibility in the market. Diff: 3 Topic: 16.4 International Debt Markets Skill: Conceptual M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 17 I n t e r n a t io n a l Po r t f ol i o T h eo r y a n d D i v e r si f i c a t ion 17.1 International Diversification and Risk M u l t i p l e C hoi c e 1) Beta may be defined as A) the measure of systematic risk. B) a risk measure of a portfolio. C) the ratio of the variance of the portfolio to the variance of the market. D) all of the above Register to View AnswerDiff: 2 Topic: 17.1 International Diversification and Risk Skill: Recognition 2) ________ risk is measured with beta. A) Systematic B) Unsystematic C) International D) Domestic Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Recognition 3) A fully diversified domestic portfolio has a beta of ________. A) 0.0 B) 1.0 C) -1.0 D) Not enough information to answer this question. 183 Copyright 2010 Pearson Education, Inc. ! Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Conceptual 4) Unsystematic risk A) is the remaining risk in a well-diversified portfolio. B) is measured with beta. C) can be diversified away. D) all of the above Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Recognition 5) A well-diversified portfolio has about ________ of the risk of the typical individual stock. A) 8% B) 19% C) 27% D) 52% Register to View AnswerDiff: 2 Topic: 17.1 International Diversification and Risk Skill: Recognition 6) An internationally diversified portfolio A) should result in a portfolio with a lower beta than a purely domestic portfolio. B) has the same overall risk shape as a purely domestic portfolio. C) is only about 12% as risky as the typical individual stock. D) all of the above Register to View AnswerDiff: 2 Topic: 17.1 International Diversification and Risk Skill: Conceptual 7) In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because A) the investor is attempting to combine assets that are perfectly correlated. B) investors are trying to reduce systematic risk. C) investors are trying to reduce the total risk of the portfolio. D) all of the above Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Conceptual 8) In some respects, internationally diversified portfolios are different from a domestic portfolio 184 Copyright 2010 Pearson Education, Inc. ! because A) investors may also acquire foreign exchange risk. B) international portfolio diversification increases expected return but does not decrease risk. C) investors must leave the country to acquire foreign securities. D) all of the above Register to View AnswerDiff: 2 Topic: 17.1 International Diversification and Risk Skill: Conceptual 185 Copyright 2010 Pearson Education, Inc. ! I n s t r u c t i o n 17 . 1 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. 9) Refer to Instruction 17.1. How many euros will the U.S. investor acquire with his initial $500,000 investment? =>'!XQ-6--@>'!R,-6R,B>'!Q--6--C>'!RZO6XEQ Register to View AnswerDiff: 3 Topic: 17.1 International Diversification and Risk Skill: Analytical E->'[)2)/'1#'T451/$<13#4'E,+E+'=1'04'0W)/0K)';/3<)'#2'!X-.580/)6'8#"'G04N'580/)5'#2'51#<\'"3%%' the investor be able to purchase? A) 8333 shares B) 6410 shares C) 6173 shares D) 10,833 shares Register to View AnswerDiff: 3 Topic: 17.1 International Diversification and Risk Skill: Analytical 11) Refer to Instruction 17.1. At the end of the year the investor sells his stock that now has an 0W)/0K)';/3<)';)/'580/)'#2'!Q,+']801'35'18)'34W)51#/^5'0W)/0K)'/01)'#2'/)1$/4'()2#/)'<#4W)/134K'18)' stock back into dollars? A) 5.0% B) -3.0% C) -5.0% D) 3.0% Register to View AnswerDiff: 3 Topic: 17.1 International Diversification and Risk Skill: Analytical 186 Copyright 2010 Pearson Education, Inc. ! 12) Refer to Instruction 17.1. At the end of the year the investor sells his stock that now has an 0W)/0K)';/3<)';)/'580/)'#2'!Q,+']801'35'18)'34W)51#/^5'0W)/0K)'/01)'#2'/)1$/4'021)/'<#4W)/134K'18)' stock back into dollars? A) -1.35% B) 5.0% C) -5.0% D) -7.24% Register to View AnswerDiff: 3 Topic: 17.1 International Diversification and Risk Skill: Analytical 13) A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return? A) 22.00% B) 23.12% C) 6.00% D) 4.88% Register to View AnswerDiff: 3 Topic: 17.1 International Diversification and Risk Skill: Analytical 14) Which of the following statements is NOT true? A) International diversification benefits induce investors to demand foreign securities. B) An international security adds value to a portfolio if it reduces risk without reducing return. C) Investors will demand a security that adds value. D) All of the above are true. Register to View AnswerDiff: 2 Topic: 17.1 International Diversification and Risk Skill: Conceptual T r u e/ F a l se 1) Portfolio diversification can eliminate 100% of risk. Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Conceptual 2) Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk. Register to View AnswerDiff: 1 Topic: 17.1 International Diversification and Risk Skill: Conceptual 187 Copyright 2010 Pearson Education, Inc. ! 17.2 Internationalizing the Domestic Portfolio M u l t i p l e C hoi c e 1) Portfolio theory assumes that investors are risk-averse. This means that investors A) cannot be induced to make risky investments. B) prefer more risk to less for a given return. C) will accept some risk, but not unnecessary risk. D) All of the above are true. Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Conceptual 2) The efficient frontier of the domestic portfolio opportunity set A) runs along the extreme left edge of the opportunity set. B) represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return. C) contains the portfolio of risky securities that the logical investor would choose to hold. D) all of the above Register to View AnswerDiff: 2 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition 3) The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier A) down and to the left. B) up and to the right. C) up and to the left. D) down and to the right. Register to View AnswerDiff: 2 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Conceptual 4) Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier. A) to the left of B) to the right of C) on D) to the right or left of Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Conceptual 188 Copyright 2010 Pearson Education, Inc. ! 5) The ________ connects the risk-free security with the optimal domestic portfolio. A) security market line B) capital asset pricing model C) capital market line D) none of the above Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition I n s t r u c t i o n 17 . 2 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. 6) Refer to Instruction 17.2. What is the expected return of the proposed portfolio? A) 9.2% B) 9.0% C) 19.2% D) 19% Register to View AnswerDiff: 3 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Analytical 7) Refer to Instruction 17.2. What is the standard deviation of the proposed portfolio? A) 38.00 B) 19.20 C) 19.00 D) 14.45 Register to View AnswerDiff: 3 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Analytical 189 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) The graph for the efficient frontier has beta on the vertical axis and standard deviation of the horizontal axis. Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition 2) The portfolio with the least risk among all those possible in the domestic portfolio opportunity set is called the minimum risk domestic portfolio. Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition 3) The optimal domestic portfolio of risky securities is the portfolio of minimum risk. Register to View AnswerDiff: 2 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition 4) The standard deviation of a portfolio is the weighted average standard deviations of the individual assets. Register to View AnswerDiff: 1 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Recognition E ssa y 1) Draw the curve representing the Optimal Domestic Efficient Frontier. Be sure to draw and label the following: The vertical axis and the horizontal axis, the risk-free security, the minimum risk portfolio, the domestic portfolio opportunity set, the optimal domestic portfolio, and the capital market line. Choose a point along the domestic portfolio opportunity set between the optimal domestic portfolio and the minimum risk domestic portfolio and explain why that point is not the optimal risky domestic portfolio for investors to hold. Answer: The graph should look like that found on page 19.5. To answer the second part of the question, the student should draw a straight-line beginning at the point of the risk-free rate of return on the vertical axis and running through the point he/she just put on the opportunity set between the minimum risk portfolio and the optimal domestic portfolio. This graphical representation clearly shows that at any point other than holding 100% in the risk-free security, the expected risk and risk characteristics of the capital market line clearly dominate the new line just drawn. Diff: 3 Topic: 17.2 Internationalizing the Domestic Portfolio Skill: Analytical 190 Copyright 2010 Pearson Education, Inc. ! 17.3 National Markets and Asset Performance M u l t i p l e C hoi c e 1) The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk. A) standard deviation; variance B) beta; variance C) standard deviation; beta D) beta; standard deviation Register to View AnswerDiff: 2 Topic: 17.3 National Markets and Asset Performance Skill: Recognition T A B L E 17.1 U se t h e i n f o r m a t ion to a n sw e r f ol low i n g q u est ion (s). 2) Refer to Table 17.1. What is the value of the Sharpe Measure for France? A) 0.113 B) 0.0071 C) either A or B D) neither A nor B Register to View AnswerDiff: 3 Topic: 17.3 National Markets and Asset Performance Skill: Analytical 3) Refer to Table 17.1. What is the value of the Treynor Measure for the Netherlands? A) 0.197 B) 0.0109 C) either A or B D) neither A nor B Register to View AnswerDiff: 3 Topic: 17.3 National Markets and Asset Performance Skill: Analytical 191 Copyright 2010 Pearson Education, Inc. ! 4) Refer to Table 17.1. ________ appears to have the greatest amount of risk as measured by monthly standard deviation, but ________ has the best return per unit of risk according to the Sharpe Measure. A) United States; Austria B) France; Austria C) United States; Netherlands D) France; Netherlands Register to View AnswerDiff: 2 Topic: 17.3 National Markets and Asset Performance Skill: Recognition 5) The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios A) are poorly diversified. B) are properly diversified. C) contain only U.S. equity investments. D) none of the above Register to View AnswerDiff: 2 Topic: 17.3 National Markets and Asset Performance Skill: Conceptual T r u e/ F a l se 1) The Sharpe and Treynor measures are each measures of return per unit of risk. Register to View AnswerDiff: 1 Topic: 17.3 National Markets and Asset Performance Skill: Recognition 2) Capital markets around the world are on average less integrated today than they were 20 years ago. Register to View AnswerDiff: 1 Topic: 17.3 National Markets and Asset Performance Skill: Recognition 192 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) If an investor is able to determine a global beta for his portfolio and holds a portfolio that is well-diversified with international investments, which performance measure is more appropriate, the Sharpe Measure or the Treynor Measure? Why? Explain each performance measure. Answer: The Sharpe Measure is the ratio of excess returns above the risk-free rate of return to the standard deviation of the portfolio. The Treynor Measure substitutes the beta of the portfolio for the denominator. Thus Sharpe measures reward per unit of portfolio risk while Treynor measures reward per unit of systematic risk. In this example, the portfolio risk and systematic risk are equivalent so either measure is appropriate. Diff: 3 Topic: 17.3 National Markets and Asset Performance Skill: Conceptual M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 18 F o r e ign D i r e c t I n v es t m e n t T h eo r y a n d Pol i t i c a l R is k 18.1 Sustaining and Transferring Competitive Advantage M u l t i p l e C hoi c e 1) An example of economies of scale in financing include A) being able to access the Euroequity, Eurobond, and Eurocurrency markets. B) being able to ship product in shiploads or carloads. C) being able to use large-scale plant and equipment. D) all of the above Register to View AnswerDiff: 2 Topic: 18.1 Sustaining and Transferring Competitive Advantage Skill: Conceptual 2) Which of the following is NOT a factor of Porter's "diamond of national advantage"? A) Factor conditions. B) Demand conditions. C) Related and supporting industries. D) All of the above are factors of the diamond of national advantage. Register to View AnswerDiff: 2 Topic: 18.1 Sustaining and Transferring Competitive Advantage Skill: Recognition E ssa y 1) List and explain three strategic motives why firms become multinationals and give an example of each. Answer: The authors provide 5 strategic motives for firms to become multinationals; market seekers, raw materials seekers, production efficiency seekers, knowledge seekers, and political 193 Copyright 2010 Pearson Education, Inc. ! safety seekers. Market seekers are looking for more consumers for their products such as automobiles, or steel. Knowledge seekers may be looking for an educated workforce similar to the way firms seeking R and D set up shop in university towns. Raw materials seekers may be after commodities such as oil or copper. Production efficiencies may occur in countries like Mexico that have capable workers and lower wages. Political safety seekers are looking for countries that will not expropriate their assets, so they may stay away from countries that in the post have engaged in such activities. Diff: 3 Topic: 18.1 Sustaining and Transferring Competitive Advantage Skill: Analytical 194 Copyright 2010 Pearson Education, Inc. ! 18.2 The OLI Paradigm and Internationalization M u l t i p l e C hoi c e 1) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture. A) licensing B) joint ventures C) foreign direct investment D) strategic alliances Register to View AnswerDiff: 1 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Recognition 2) The O in OLI refers to an advantage in a firm's home market that is ________. A) operator independent B) owner-specific C) open-market D) official designation Register to View AnswerDiff: 2 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Recognition 3) The owner-specific advantages of OLI must be ________. A) firm-specific B) not easily copied C) transferable to foreign subsidiaries D) all of the above Register to View AnswerDiff: 2 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Recognition 4) A/n ________ would be an example of an owner-specific advantage for an MNE. A) patent B) economy of scale C) economy of scope D) all of the above Register to View AnswerDiff: 2 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Conceptual 195 Copyright 2010 Pearson Education, Inc. ! 5) The L in OLI refers to an advantage in a firm's home market that is a A) liability in the domestic market. B) location-specific advantage. C) longevity in a particular market. D) none of the above. Register to View AnswerDiff: 2 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Recognition 6) A/n ________ would be an example of a location-specific advantage for an MNE. A) patent B) economy of scale C) unique source of raw materials D) possession of proprietary information Register to View AnswerDiff: 1 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Conceptual 7) The I in OLI refers to an advantage in a firm's home market that is an ________. A) internalization B) industry-specific advantage C) international abnormality D) none of the above Register to View AnswerDiff: 2 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Recognition 8) A/n ________ would be an example of an internalization advantage for an MNE. A) patent B) economy of scale C) unique source of raw materials D) possession of proprietary information Register to View AnswerDiff: 1 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Conceptual 196 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) What does the OLI Paradigm propose to explain? Define each component and provide an example of each. Answer: The OLI Paradigm is an attempt to develop an overall framework to explain why MNEs choose FDI to serve foreign markets rather than alternatives such as licensing or exporting. The letters of the paradigm are O for owner-specific advantages, L for locationspecific advantages, and I for internalization. Owner-specific advantages require that the firm have a comparative advantage in its home market that it feels it can exploit internationally. To be most effective, the advantages should be difficult to copy. Location specific advantages may be due to market imperfections or genuine comparative advantages such as a source of a particularly high quality natural resource. With internalization the firm has in its possession some proprietary information or product such as software or personnel that may provide an advantage in the international marketplace. Diff: 3 Topic: 18.2 The OLI Paradigm and Internationalization Skill: Analytical 18.3 Deciding Where to Invest M u l t i p l e C hoi c e 1) The L in OLI refers to an advantage in a firm's home market that is a A) liability in the domestic market. B) location-specific advantage. C) longevity in a particular market. D) none of the above Register to View AnswerDiff: 2 Topic: 18.3 Deciding Where to Invest Skill: Recognition 2) Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally? A) MNEs initially invest in countries with a similar "national psychic." B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest. C) Initial investments tend to be much larger than subsequent ones. D) All of the above have been observed. Register to View AnswerDiff: 2 Topic: 18.3 Deciding Where to Invest Skill: Recognition 197 Copyright 2010 Pearson Education, Inc. ! 18.4 How to Invest Abroad: Modes of Foreign Investment M u l t i p l e C hoi c e 1) Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI? A) Fewer political risks. B) Greater agency costs. C) Lower front-end investment. D) All of the above are advantages. Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 2) Which of the following is an advantage to exporting goods to reach international markets rather than entering into some form of FDI? A) Fewer agency costs. B) Fewer direct advantages from research and development. C) A greater risk of losing markets to copycat goods producers. D) An inability to exploit R&D as effectively as if also invested abroad. Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 3) Which of the following is NOT a form of FDI? A) Wholly-owned affiliate. B) Joint venture. C) Exporting. D) Greenfield investment. Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition 4) With licensing the ________ is likely to be lower than with FDI because of lower profits; however, the ________ is likely to be higher due to a greater return per dollar invested. A) IRR; NPV B) NPV; IRR C) cost of capital; NPV D) IRR; cost of capital Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 198 Copyright 2010 Pearson Education, Inc. ! 5) Which of the following is NOT a potential disadvantage of licensing relative to FDI? A) Possible loss of quality control. B) Establishment of a potential competitor in third-country markets. C) Possible improvement of the technology by the local licensee, which then enters the original firm's home market. D) All of the above are potential disadvantages to licensing. Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition 6) A ________ is a shared ownership in a foreign business. A) licensing agreement B) greenfield investment C) joint venture D) wholly-owned affiliate Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition 7) Which of the following is NOT an advantage to a joint venture? A) Possible loss of opportunity to enter the foreign market with FDI later. B) The local partner understands the customs and mores of the foreign market. C) The local partner can provide competent management at many levels. D) May be a realistic alternative when 100% foreign ownership is not allowed. Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition 8) Greenfield investments are typically ________ and ________ than cross-border acquisition. A) slower; more uncertain B) faster; of greater certainty C) slower; of greater certainty D) faster; more uncertain Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 199 Copyright 2010 Pearson Education, Inc. ! 9) All of the following may be justification for a strategic alliance EXCEPT: A) takeover defense. B) a joint venture to pool resources for research and development. C) joint marketing and serving agreements. D) All of the above are legitimate reasons for strategic alliances. Register to View AnswerDiff: 2 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition T r u e/ F a l se 1) Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized. Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 2) MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries. Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 3) Joint ventures are a more common FDI than wholly owned subsidiaries. Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Recognition 4) Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm. Register to View AnswerDiff: 1 Topic: 18.4 How to Invest Abroad: Modes of Foreign Investment Skill: Conceptual 200 Copyright 2010 Pearson Education, Inc. ! 18.5 Foreign Direct Investment Originating in Developing Countries M u l t i p l e C hoi c e 1) Which of the following is the motivation for making foreign direct investment? A) Knowledge seeking. B) Market seeking. C) Raw material seeking. D) all of the above Register to View AnswerDiff: 2 Topic: 18.5 Foreign Direct Investment Originating in Developing Countries Skill: Recognition 18.6 Foreign Direct Investment and Political Risk M u l t i p l e C hoi c e 1) ________ risks are those that affect the MNE at the local or project level, but originate at the country level. A) Country-specific B) Firm-specific C) Global-specific D) none of the above Register to View AnswerDiff: 2 Topic: 18.6 Foreign Direct Investment and Political Risk Skill: Recognition 2) Which of the following is NOT an example of a country-specific risk? A) Transfer risk. B) War and ethnic strife. C) Cultural and religious heritage. D) All of the above are examples of country-specific risk. Register to View AnswerDiff: 2 Topic: 18.6 Foreign Direct Investment and Political Risk Skill: Recognition T r u e/ F a l se 1) When faced with additional risk from a foreign investment, firms typically account for the additional risk by adjusting the discount rates or by adjusting cash flows. Register to View AnswerDiff: 1 Topic: 18.6 Foreign Direct Investment and Political Risk Skill: Conceptual 201 Copyright 2010 Pearson Education, Inc. ! 18.7 Assessing Political Risk M u l t i p l e C hoi c e 1) According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a ________ or ________ level view. A) foreign; domestic B) micro; macro C) internal; external D) local; global Register to View AnswerDiff: 2 Topic: 18.7 Assessing Political Risk Skill: Conceptual T r u e/ F a l se 1) A number of institutional services provide updated country risk ratings on a regular basis. This is an example of micro-risk information for MNEs using this data. Register to View AnswerDiff: 2 Topic: 18.7 Assessing Political Risk Skill: Recognition 18.8 Firm-Specific Risks M u l t i p l e C hoi c e 1) ________ is the ability to exercise effective control over a foreign subsidiary within a country's legal and political environment. A) Political risk B) Portfolio risk C) Interest rate risk D) Governance risk Register to View AnswerDiff: 1 Topic: 18.8 Firm-Specific Risks Skill: Recognition 202 Copyright 2010 Pearson Education, Inc. ! 2) Of the following, which would NOT be considered an issue for an investment agreement prior to investing in a foreign country? A) The basis for setting transfer prices. B) The right to export to third-country markets. C) Provision for arbitration of disputes. D) All of the above could be negotiated prior to investing. Register to View AnswerDiff: 2 Topic: 18.8 Firm-Specific Risks Skill: Conceptual 3) OPIC stands for A) Organization for the Prevention of Insufficient Capitalization. B) Organization of Petroleum Importing Countries. C) Overseas Private Investment Corporation. D) Overseas Public Insurance Commission. Register to View AnswerDiff: 2 Topic: 18.8 Firm-Specific Risks Skill: Recognition 4) ________ is a type of political risk that OPIC does NOT cover. A) Inconvertibility B) Expropriation C) War D) OPIC covers all of the above. Register to View AnswerDiff: 2 Topic: 18.8 Firm-Specific Risks Skill: Recognition 5) ________ is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm's assets. A) Inconvertibility B) Expropriation C) Business income risk D) None of the above Register to View AnswerDiff: 1 Topic: 18.8 Firm-Specific Risks Skill: Recognition 203 Copyright 2010 Pearson Education, Inc. ! 6) ________ is NOT one of the three main country-specific risks as outlined by your authors. A) Transfer risk B) Cultural differences C) Thin equity base D) Protectionism Register to View AnswerDiff: 2 Topic: 18.8 Firm-Specific Risks Skill: Recognition T r u e/ F a l se 1) A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value. Register to View AnswerDiff: 1 Topic: 18.8 Firm-Specific Risks Skill: Conceptual 18.9 Country-Specific Risks: Transfer Risk M u l t i p l e C hoi c e 1) Blocked funds are cash flows that A) come in regular intervals in standardized amounts or blocks. B) have been restricted in transfer out of a local country. C) come from a certain sector or region of the world. D) none of the above Register to View AnswerDiff: 2 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Recognition 2) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank. A) fronting; link financing B) parallel; a back-to-back loan C) fronting; a back-to-back loan D) link financing; parallel loan Register to View AnswerDiff: 2 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Recognition 204 Copyright 2010 Pearson Education, Inc. ! 3) Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary? A) The parent makes a deposit equal to the size of the desired loan into a large commercial bank. B) The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate. C) The lending bank is located in the subsidiary's country. D) All of the above are typical characteristics of a fronting loan. Register to View AnswerDiff: 2 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Recognition 4) Which of the following could be considered an example of forced reinvestment if the blockage of funds was expected to be temporary? A) Vertical reinvestment by an automobile manufacturer to buy parts suppliers and showrooms. B) A lumber cutting company subsequently builds a paper mill with blocked funds. C) Purchase of local money market instruments and short-term loans. D) all of the above Register to View AnswerDiff: 2 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Conceptual T r u e/ F a l se 1) Banks are very hesitant to engage in fronting loans because of the low probability of repayment and thus their risk exposure up to a 100% loss. Register to View AnswerDiff: 1 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Conceptual 205 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds. Answer: Blocked funds are those that have been restricted from foreign exchange in some fashion by the government of the host country. If this is a potential problems firms take a number of steps to reduce or minimize the impact of such a governmental action. In this chapter the authors identify three techniques for dealing with the problem of blocked funds. First, using fronting loans. Here the firm deposits money into a large financial institution, typically in a neutral third country, and then has the bank loan the same amount to the foreign subsidiary. There are several reasons why governments are more likely to allow repayments of such loans as opposed to repayment to the parent. Second, the local firm may create new exports thus increasing the flow of currency into the country and achieving the goals of the government. Third, the authors also mention a special dispensation whereby firms in highly desirable and specialized industries such as telecommunications or pharmaceuticals are contractually guaranteed repatriation of funds at a greater rate than normal. Diff: 3 Topic: 18.9 Country-Specific Risks: Transfer Risk Skill: Conceptual 18.10 Country-Specific Risks: Cultural and Institutional Risks M u l t i p l e C hoi c e 1) Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries? A) Differences in human resource norms. B) Differences in religious heritage. C) Differences in allowable ownership structures. D) All of the above must be considered. Register to View AnswerDiff: 2 Topic: 18.10 Country-Specific Risks: Cultural and Institutional Risks Skill: Recognition 2) An alternative strategy to engaging in bribery in international investments include: A) Refuse bribery outright. B) Retain local advisors to diffuse requests for bribes. C) Educate management and local employees about the firm's bribery policy. D) all of the above Register to View AnswerDiff: 2 Topic: 18.10 Country-Specific Risks: Cultural and Institutional Risks Skill: Recognition 206 Copyright 2010 Pearson Education, Inc. ! 3) ________ industries are NOT typically "protected" by government policy. A) Textiles B) Defense C) Agriculture D) "Infant" industries Register to View AnswerDiff: 1 Topic: 18.10 Country-Specific Risks: Cultural and Institutional Risks Skill: Recognition 4) Forming regional alliances is one way to help mitigate the practice of government protectionism. Which of the following is NOT a regional trade organization formed by government treaty? A) EU B) NAFTA C) NATO D) MERCOSUR Register to View AnswerDiff: 1 Topic: 18.10 Country-Specific Risks: Cultural and Institutional Risks Skill: Recognition 18.11 Global-Specific Risks M u l t i p l e C hoi c e 1) Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks. A) firm-specific B) country-specific C) institutional D) global-specific Register to View AnswerDiff: 2 Topic: 18.11 Global-Specific Risks Skill: Recognition 2) Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk. A) firm-specific B) country-specific C) global-specific D) cultural-specific Register to View AnswerDiff: 2 Topic: 18.11 Global-Specific Risks Skill: Recognition 207 Copyright 2010 Pearson Education, Inc. ! 3) The speed at which inventory moves through a manufacturing process is known as ________. A) supply chain management B) working capital management C) inventory velocity D) warp speed Register to View AnswerDiff: 2 Topic: 18.11 Global-Specific Risks Skill: Recognition 4) As a result of the terrorist attacks of September 11, 2001, many firms have employed a wide range of tactics to ensure continued flow of inventory in the face of government steps to curb terrorism. Which of the following is an inventory sourcing strategy response (as opposed to an inventory management response, or a transportation response)? A) Carrying more inventory on-hand. B) Minimize cross-border exposure from suppliers. C) Shifting to air cargo shipments instead of co-habitation of products and passengers on commercial air flights. D) Increasing the on-hand supply of critical parts. Register to View AnswerDiff: 2 Topic: 18.11 Global-Specific Risks Skill: Conceptual T r u e/ F a l se 1) Many problems such as poverty, environmental concerns, and cyber attacks are beyond the capabilities of MNEs alone to correct and require government participation as well. Register to View AnswerDiff: 1 Topic: 18.11 Global-Specific Risks Skill: Conceptual 2) Business risk can be measured through sensitivity analysis but from only the project viewpoint. Register to View AnswerDiff: 1 Topic: 18.11 Global-Specific Risks Skill: Conceptual 208 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 19 M u l t i n a t ion a l C a p i t a l B u d ge t i ng 19.1 Project Versus Parent Valuation M u l t i p l e C hoi c e 1) The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called ________. A) cost of capital analysis B) capital budgeting C) capital structure analysis D) agency theory Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 2) Which of the following is NOT a basic step in the capital budgeting process? A) Identify the initial capital invested. B) Estimate the cash flows to be derived from the project over time. C) Identify the appropriate interest rate at which to discount future cash flows. D) All of the above are steps in the capital budgeting process. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 3) Of the following capital budgeting decision criteria, which does NOT use discounted cash flows? A) Net present value. B) Internal rate of return. C) Accounting rate of return. D) All of these techniques typically use discounted cash flows. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 209 Copyright 2010 Pearson Education, Inc. ! 4) Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project? A) Parent cash flows must be distinguished from project cash flows. B) Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms. C) Differing rates of inflation between the foreign and domestic economies. D) All of the above add complexity to the international capital budgeting process. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 5) Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint. A) local; be subordinated to; parent's B) local; not be subordinated to; parent's C) parent's; be subordinated to; local D) none of the above Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 6) For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned. A) 20% B) 40% C) 50% D) 75% Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 7) A foreign firm that is 20% to 49% owned by a parent is called a/an ________. A) subsidiary B) affiliate C) partner D) rival Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 210 Copyright 2010 Pearson Education, Inc. ! 8) Affiliate firms are consolidated on the parent's financial statements on a ________ basis. A) pro rated B) 50% C) 75% D) 100% Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 9) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87 krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough information to answer this question. Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 10) When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project? A) an NPV > $0 B) an IRR > the project's required rate of return C) an IRR > $0 D) All of the above are correct indicators. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 11) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar. A) 7.87 krone per dollar B) 8.10 krone per dollar C) 8.34 krone per dollar D) There is not enough information to answer this question. Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 211 Copyright 2010 Pearson Education, Inc. ! 12) When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary? A) The firm's tax rate. B) The firm's cost of debt. C) The firm's cost of equity. D) All of the above are necessary. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 13) When determining a firm's weighted average cost of capital (WACC) which of the following terms is NOT necessary? A) The firm's weight of equity financing. B) The risk-free rate of return. C) The firm's weight of debt financing. D) All of the above are necessary to determine a firm's WACC. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 212 Copyright 2010 Pearson Education, Inc. ! I n s t r u c t i o n 19 . 1 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe. 14) Refer to Instruction 19.1. What are the annual after-tax cash flows for the Wheel Deal project? =>'!O--6--@>'!DO-6--B>'!ED-6--C>'!RX-6--Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 15) Refer to Instruction 19.1. What is the initial investment for the Wheel Deal project? A) $1,500,000 @>'!E6X--6--C) $1,600,000 C>'!E6Q--6--Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 213 Copyright 2010 Pearson Education, Inc. ! 16) Refer to Instruction 19.1. What is the NPV of the European expansion if Wheel Deal first computes the NPV in euros and then converts that figure to dollars using the current spot rate? A) $1,520,000 B) $1,684,210 C) -$75,310 D) -$71,544 Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 17) Refer to Instruction 19.1. In euros, what is the NPV of the Wheel Deal expansion? =>'!E6QDO6XYB) $1,611,317 C) -!,Q6RED) -!EEE6RE, Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 18) Refer to Instruction 19.1. What is the IRR of the Wheel Deal expansion? A) 14.4% B) 10.3% C) 12.0% D) 8.6% Register to View AnswerDiff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 19) If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be ________. A) less than the cost of capital B) greater than the cost of capital C) greater than the cost of the project D) cannot be determined from this information Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 214 Copyright 2010 Pearson Education, Inc. ! 20) When estimating a firm's cost of equity capital using the CAPM, you need to estimate A) the risk-free rate of return. B) the expected return on the market portfolio. C) the firm's beta. D) all of the above Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 21) ________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country. A) Exchange risk B) Foreign risk C) Political risk D) Unnecessary risk Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 22) Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency. A) appreciating; depreciating B) depreciating; depreciating C) appreciating; appreciating D) depreciating; appreciating Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Conceptual T r u e/ F a l se 1) There are no important differences between domestic and international capital budgeting methods. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 215 Copyright 2010 Pearson Education, Inc. ! 2) It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Recognition 3) The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Conceptual 4) When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital. Register to View AnswerDiff: 2 Topic: 19.1 Project versus Parent Valuation Skill: Conceptual E ssa y 1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm. Register to View Answerproject might have a positive NPV from the local viewpoint, but fail to consider relevant cash flows from the parent viewpoint. For example, a positive NPV project in one country may result from the erosion of revenues in another. A local manager would not necessarily be expected to be aware of such erosion. It may not be possible to remit all or part of the local cash flows to the parent company and reinvestment opportunities in the local economy may be inferior to what the parent could do elsewhere, thus, a less than maximum use of funds. Political and exchange rate risk add to the uncertainty of cash flows and thus increase the required rate of return by stockholders. Cash flows may be more difficult to estimate especially long-term cash flows in lesser-developed countries. Diff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Analytical 216 Copyright 2010 Pearson Education, Inc. ! 2) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting. Answer: The evaluation of foreign projects must consider several risks that are either nonexistent or much less important in domestic capital budgeting. First, if revenues and expenses are in a foreign currency, then the parent firm must estimate the exchange rate at which the foreign currency will be converted into the domestic currency. To estimate future exchange rates, the parent firm must estimate expected rates of inflation and interest rates in both countries, economic growth in each country, as well as consumer preferences and tastes in more than one country. Then, aspects of political risk must be considered. What is the likelihood that all or part of the cash flows accruing to the parent firm will be restricted through some political act? The firm must now consider the possibility of changing tax rates, new taxes, and additional restrictions on the flow of funds. Furthermore, local norms may differ from usual firm practice in terms of financing or dividend policy. Domestic capital budgeting may seem quite easy in comparison. Diff: 3 Topic: 19.1 Project versus Parent Valuation Skill: Conceptual 19.2 Real Option Analysis M u l t i p l e C hoi c e 1) Which of the following is NOT an example of political risk? A) Expropriation of cash flows by a foreign government. B) The U.S. government restricts trade with a foreign country where your firm has investments. C) The foreign government nationalizes all foreign-owned assets. D) All of the above are examples of political risk. Register to View AnswerDiff: 2 Topic: 19.2 Real Option Analysis Skill: Recognition 2) Real option analysis allows managers to analyze all of the following EXCEPT: A) the option to defer. B) the option to abandon. C) the option to alter capacity. D) All of the above may be analyzed using real option analysis. Register to View AnswerDiff: 2 Topic: 19.2 Real Option Analysis Skill: Recognition 217 Copyright 2010 Pearson Education, Inc. ! 19.3 Project Financing M u l t i p l e C hoi c e 1) Which of the following is NOT a factor critical to the success of project financing? A) Separability of the project from its investors. B) Long-lived and capital intensive singular projects. C) Cash flow predictability from third part commitments. D) All of the above are critical factors for project financing. Register to View AnswerDiff: 2 Topic: 19.3 Project Financing Skill: Conceptual T r u e/ F a l se 1) Project financing is the arrangement of financing for very large individual long-term capital projects. Register to View AnswerDiff: 1 Topic: 19.3 Project Financing Skill: Recognition M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 20 M u l t i n a t ion a l T a x M a n age m e n t 20.1 Tax Principles M u l t i p l e C hoi c e 1) The issue of ethics in the reporting of income and the payment of taxes is a considerable one. The authors state that most MNEs operating in foreign countries tend to follow the general principle of A) "when in Rome, do as the Romans do." B) full disclosure to the tax authorities. C) maintain a competitive playing field by cheating as much as the local competition, no more, no less. D) none of the above Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Conceptual 2) Which of the following is an unlikely objective of U.S. government policy for the taxation of foreign MNEs? A) to raise revenues B) to provide an incentive for U.S. private investment in developing countries 218 Copyright 2010 Pearson Education, Inc. ! C) to improve the U.S. balance of payments D) All of the above are objectives. Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Recognition 3) A ________ tax policy is one that has no impact on private decision-making, while a ________ policy is designed to encourage specific behavior. A) flat; tax incentive B) neutral; flat C) neutral; tax incentive D) none of the above Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Conceptual 219 Copyright 2010 Pearson Education, Inc. ! 4) Which of the following is NOT an example of a tax incentive policy. A) The federal government gives a tax credit to MNEs that make domestic capital improvements but not foreign capital improvements. B) Corporations are allowed to take a direct tax credit for each dollar of matching donations they make to institutions of higher education. C) A tax law is passed that makes interest on property non tax-deductible, but interest payments on durable goods are. D) All are examples of a tax incentive policy. Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Conceptual 5) Toyota Motor Company operates in many different countries and pays taxes at many different rates. However, they always pay the same rate as their local competitors. General Motors is operating in an environment of ________ tax policy. A) domestic neutrality B) foreign neutrality C) territorial approach D) none of the above Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Recognition 6) The United States taxes the domestic and remitted foreign earnings of U.S. based MNEs no matter where the earnings occurred. This is an example of a ________ approach to levying taxes. A) worldwide B) territorial C) neutral D) equitable Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Recognition 7) The United States taxes all earnings on U.S. soil by both domestic and foreign firms. This is an example of a ________ approach to levying taxes. A) worldwide B) neutral C) territorial D) none of the above Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Conceptual 220 Copyright 2010 Pearson Education, Inc. ! 8) Jensen Optimetrics Inc. is based in a country with a territorial approach to taxation but generates 100% of its income in a country with a worldwide approach to taxation. The tax rate in the country of incorporation is 25%, and the tax rate in the country where they earn their income is 50%. In theory, and barring any special provisions in the tax codes of either country, Jensen should pay taxes at a rate of ________. A) 75% B) 62.5% C) 0% D) 50% Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 9) The t e r r i tor i a l approach to taxation policy is also termed the ________ approach. A) source B) ethical C) greedy D) location Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Recognition 10) A tax that is effectively a sales tax at each stage of production is defined as a/an ________ tax. A) flat B) equitable C) value-added tax D) none of the above Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Recognition 11) What is the total value of taxes paid in the following example if the value added tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel. A) $0.15 B) $0.20 C) $0.30 D) $0.40 Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 221 Copyright 2010 Pearson Education, Inc. ! T A B L E 20.1 U ses t h e i n f o r m a t ion to a n sw e r f ol low i n g q u est ion (s). MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions. 12) Refer to Table 20.1. If MetroCity pays out 50% of its earnings from each subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea respectively. A) Ukraine = $0; Korea = ($30,000) B) Ukraine = $100,000; Korea = $0 C) Ukraine = $0; Korea = $66,250 D) none of the above Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 13) Refer to Table 20.1. The additional U.S. taxes due on the repatriation of income from the Ukraine to the United States, alone, assuming a 50% payout rate, is A) excess foreign tax credits of $110,000. B) additional U.S. taxes due of $97,000. C) additional U.S. taxes due of $36,500. D) excess foreign tax credits of $18,500. Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 14) Refer to Table 20.1. How much in additional U.S. taxes would be due if MetroCity averaged the tax credits and liabilities of the two foreign units, assuming a 50% payout rate from each? A) $3,750 B) $13,750 C) $2,500 D) $0 Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 222 Copyright 2010 Pearson Education, Inc. ! 15) Refer to Table 20.1. If MetroCity set the payout rate from the Ukraine subsidiary at 25%, how should MetroCity set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill? A) 28.5% B) 24.5% C) 42.6% D) 82.3% Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Analytical 16) Refer to Table 20.1. What is the minimum effective tax rate that MetroCity can achieve on its foreign-sourced income? A) 26% B) 35% C) 40% D) 0% Register to View AnswerDiff: 3 Topic: 20.1 Tax Principles Skill: Recognition T r u e/ F a l se 1) The primary objective of multinational tax planning is to minimize the firm's worldwide tax burden. Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Recognition 2) A country CANNOT have both a territorial and a worldwide approach as a national tax policy. Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Conceptual 3) Tax treaties generally have the effect of increasing the withholding taxes between the countries that are negotiating the treaties. Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Conceptual 223 Copyright 2010 Pearson Education, Inc. ! 4) A value-added tax has gained widespread usage in Western Europe, Canada, and parts of Latin America. Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Recognition 5) All indications are that the value-added tax will soon be the dominant form of taxation in the U.S. Register to View AnswerDiff: 1 Topic: 20.1 Tax Principles Skill: Recognition 6) Among the G7 nations, the U.S. has a below average corporate income tax rate that makes it attractive for other countries to invest in the U.S. Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Recognition 7) In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates than the U.S. Register to View AnswerDiff: 2 Topic: 20.1 Tax Principles Skill: Recognition E ssa y 1) Explain the worldwide and territorial approaches of national taxation. The authors state that the United States uses both approaches. How can this be? Give an example of each taxation approach. Answer: The worldwide approach taxes the income of firms based on their place of residence rather than on where the income was earned. Thus, a U.S. based MNE will owe U.S. taxes on income earned in, say, Britain. The territorial approach to taxation taxes all of the income earned within the borders of the country by both domestic and foreign-based firms. Thus, a Britishbased firm making sales in New York will owe taxes in the U.S. Through a series of bilateral tax agreements the U.S. and several trading partners have tried to workout tax issues. Generally, the taxes a U.S. based MNE pays abroad will help offset any required taxes the firm might have on funds remitted to the United States. Diff: 3 Topic: 20.1 Tax Principles Skill: Analytical 224 Copyright 2010 Pearson Education, Inc. ! 2) What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose this form of taxation has NOT been widely accepted in the United States? Register to View Answervalue-added tax (VAT) is a form of national sales tax, where goods are taxed at each step of extraction, production, wholesale, and retail. A VAT tax is considered regressive because those with lower incomes pay the same taxes on a particular commodity as those with more money. Americans have never taken to this type of national tax because the most similar type of state and local tax is the sales tax, and that has always been the domain of the states. Plus the fact that it is regressive make the tax a tough sell to tax payers. Diff: 3 Topic: 20.1 Tax Principles Skill: Conceptual 20.2 Transfer Pricing M u l t i p l e C hoi c e 1) A tax that is a form of social redistribution of income is defined as a/an ________ tax. A) un-American B) transfer C) flat D) none of the above Register to View AnswerDiff: 2 Topic: 20.2 Transfer Pricing Skill: Recognition 2) A ________ is a direct reduction of taxes whereas a ________ reduces the taxable income before taxes. A) foreign tax credit; domestic tax credit B) tax deduction; tax credit C) tax credit; tax deduction D) none of the above Register to View AnswerDiff: 2 Topic: 20.2 Transfer Pricing Skill: Recognition 225 Copyright 2010 Pearson Education, Inc. ! I n s t r u c t i o n 20 . 1 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). Rogue River Exporters USA has $100,000 of before tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%. 3) Refer to Instruction 20.1. If the U.S. has no bilateral trade agreement with the host country, what is the total amount of income taxes Rogue River Exporters will pay? A) $25,000 B) $35,000 C) $51,250 D) $60,000 Register to View AnswerDiff: 3 Topic: 20.2 Transfer Pricing Skill: Analytical 4) Refer to Instruction 20.1. If the U.S. has a bilateral trade agreement with the host country that calls for the total tax paid to be equal to the maximum amount that could be paid in the highest taxing country, what is the total amount of income taxes Rogue River Exporters will pay to the host country, and how much will they pay in U.S income taxes on the foreign earned income? A) $25,000; $10,000 B) $25,000; $26,250 C) $35,000; $0 D) none of the above Register to View AnswerDiff: 3 Topic: 20.2 Transfer Pricing Skill: Analytical 5) Refer to Instruction 20.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-deductible expense, then Rogue River's total U.S. corporate tax on the foreign earnings would be ________. A) $10,000 B) $26,250 C) $35,000 D) $51,250 Register to View AnswerDiff: 3 Topic: 20.2 Transfer Pricing Skill: Analytical 226 Copyright 2010 Pearson Education, Inc. ! 6) Refer to Instruction 20.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-credit, then Rogue River's total U.S. corporate tax on the foreign earnings would be ________. A) $51,250 B) $35,000 C) $26,250 D) $10,000 Register to View AnswerDiff: 3 Topic: 20.2 Transfer Pricing Skill: Analytical 7) Tax treaties typically result in ________ between the two countries in question. A) lower property taxes for U.S. citizens overseas B) elimination of differential tax rates C) increased double taxation D) reduced withholding tax rates Register to View AnswerDiff: 1 Topic: 20.2 Transfer Pricing Skill: Recognition 8) Transfer pricing is a strategy that may be used by MNEs to A) reduce consolidated corporate income taxes. B) partially finance a subsidiary in another country. C) transfer funds from a subsidiary to the parent corporation. D) all of the above Register to View AnswerDiff: 2 Topic: 20.2 Transfer Pricing Skill: Recognition 9) ________ is the pricing of goods, services, and technology between related companies. A) Among pricing B) Retail pricing C) Transfer pricing D) Wholesale pricing Register to View AnswerDiff: 1 Topic: 20.2 Transfer Pricing Skill: Recognition 227 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses. Register to View AnswerDiff: 1 Topic: 20.2 Transfer Pricing Skill: Conceptual 2) The U.S. Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making, thus establishing a "guilty until proved innocent" tax approach. Register to View AnswerDiff: 2 Topic: 20.2 Transfer Pricing Skill: Recognition 20.3 Tax Haven Subsidiaries and International Offshore Financial Centers M u l t i p l e C hoi c e 1) Tax haven subsidiaries are typically established in a country that can meet which of the following requirements? A) A low tax on foreign investment or sales income earned by resident corporations and a low dividend withholding tax on dividends paid to the parent firm. B) A stable currency to permit easy conversion of funds into and out of the local currency. C) The facilities to support financial services such as good communications, professional qualified office workers, and reputable banking services. D) Tax haven countries have all of the above characteristics. Register to View AnswerDiff: 2 Topic: 20.3 Tax Haven Subsidiaries and International Offshore Financial Centers Skill: Conceptual T r u e/ F a l se 1) Tax haven subsidiaries of MNEs are categorically referred to as international offshore financial centers. Register to View AnswerDiff: 2 Topic: 20.3 Tax Haven Subsidiaries and International Offshore Financial Centers Skill: Recognition 228 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 21 W o r k i n g C a p i t a l M a n age m e n t 21.1 Constraints on Repositioning Funds M u l t i p l e C hoi c e 1) Each of the following is listed by your authors as a constraint on repositioning funds by an MNE EXCEPT: A) political constraints. B) tax constraints. C) transaction costs. D) All of the above are listed by your authors. Register to View AnswerDiff: 1 Topic: 21.1 Constraints on Repositioning Funds Skill: Recognition T r u e/ F a l se 1) Local liquidity needs sometime5'3G;0<1'0'23/GL5'"#/%&"3&)'#;13G0%'<058';#5313#4+' Register to View AnswerDiff: 1 Topic: 21.1 Constraints on Repositioning Funds Skill: Recognition 21.2 Conduits for Moving Funds by Unbundling Them M u l t i p l e C hoi c e 1) ________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains. A) Unbundling funds B) Bundling funds C) Coordinating funds D) none of the above Register to View AnswerDiff: 1 Topic: 21.2 Conduits for Moving Funds by Unbundling Them Skill: Recognition 229 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit. Register to View AnswerDiff: 1 Topic: 21.2 Conduits for Moving Funds by Unbundling Them Skill: Conceptual 21.3 International Dividend Remittances M u l t i p l e C hoi c e 1) In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT: A) interest rate differences between the two countries. B) the negative impact on host country relations. C) defection on the part of executives in the home headquarters. D) MNEs must be concerned with all of the above. Register to View AnswerDiff: 1 Topic: 21.3 International Dividend Remittances Skill: Conceptual T r u e/ F a l se 1) Political risk may motivate parent firms to require foreign subsidiaries to remit all locally generated funds above that required to internally finance growth in sales and planned capital expansions. Register to View AnswerDiff: 1 Topic: 21.3 International Dividend Remittances Skill: Recognition 230 Copyright 2010 Pearson Education, Inc. ! 21.4 Operating Cycle M u l t i p l e C hoi c e 1) Working capital management involves the management of A) current and long-term assets. B) current assets and current liabilities. C) current liabilities and long-term assets. D) current liabilities and long-term debt and equity. Register to View AnswerDiff: 1 Topic: 21.4 Operating Cycle Skill: Recognition 2) The cash conversion cycle A) is a subset of the operating cycle. B) occurs in the latter stages of the operating cycle. C) is a subset of the accounts receivable period. D) all of the above. Register to View AnswerDiff: 2 Topic: 21.4 Operating Cycle Skill: Recognition 3) The proper order of events for the operating cycle is A) input serving period, accounts receivable period, inventory period, quotation period. B) quotation period, accounts receivable period, inventory period, input servicing period. C) quotation period, input servicing period, inventory period, accounts receivable period. D) accounts receivable period, input servicing period, quotation period, inventory period. Register to View AnswerDiff: 2 Topic: 21.4 Operating Cycle Skill: Recognition 4) Polaris Corporation (US) has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the A) quotation period. B) input sourcing period. C) cash conversion cycle. D) accounts payable cycle. Register to View AnswerDiff: 2 Topic: 21.4 Operating Cycle Skill: Conceptual 231 Copyright 2010 Pearson Education, Inc. ! 5) The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period. A) quotation B) input sourcing C) accounts payable D) accounts receivable Register to View AnswerDiff: 2 Topic: 21.4 Operating Cycle Skill: Recognition 6) The accounts payable period of the operating cycle A) is equal to the inventory period. B) may run concurrently but shorter than the inventory period. C) may run concurrently but longer than the inventory period. D) any one of the above may be true. Register to View AnswerDiff: 2 Topic: 21.4 Operating Cycle Skill: Recognition 21.5 Net Working Capital M u l t i p l e C hoi c e 1) One possible definition of net working capital (NWC) provided by your authors is A) NWC = A/R + inventory - A/P. B) NWC = cash +A/P - inventory. C) NWC = A/P + A/R - short-term loans. D) NWC = A/R + inventory - long-term debt. Register to View AnswerDiff: 2 Topic: 21.5 Net Working Capital Skill: Recognition 2) Which of the following actions will result in an increase in NWC? A) An increase in A/P that exceeds an increase in A/R. B) A reduction in inventory. C) A reduction in A/P plus a smaller reduction in A/R. D) An increase in A/P and a smaller reduction in inventory. Register to View AnswerDiff: 2 Topic: 21.5 Net Working Capital Skill: Conceptual 232 Copyright 2010 Pearson Education, Inc. ! 3) Which of the following statements is true? A) A/R provide part of the funding for inventory. B) A/P provide part of the funding for A/R and inventory. C) Inventory pays for A/R and A/P. D) None of the above is true. Register to View AnswerDiff: 2 Topic: 21.5 Net Working Capital Skill: Conceptual T A B L E 21.1 U s e t h e i n f o r m a t i o n t o a n s w e r f o l l o w i n g q u e s t i o n (s) . Pol a r is C o r p o r a t ion B a l a n c e S h e e t D e c e m b e r 31, 20x x 4) Refer to Table 21.1. The NWC for Polaris is ________. A) $80,000 B) $680,000 C) $35,000 D) $45,000 Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 5) Refer to Table 21.1. If Polaris increases inventory by $10,000 and A/P also by $10,000, the net change in NWC is ________. A) $20,000 B) $10,000 C) $0 D) none of the above Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 233 Copyright 2010 Pearson Education, Inc. ! 6) Refer to Table 21.1. NWC currently makes up what percentage of total firm value for Polaris? A) 6.6% B) 5.1% C) 11.8% D) 9.2% Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical I n s t r u c t i o n 21 . 1 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical. 7) Refer to Instruction 21.1. What is the amount of money SureDrip will save on accounts payable if they accept the discount? A) $400,000 B) $8,000 C) $33,333 D) $20,000 Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 8) Refer to Instruction 21.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical? A) 7.3% B) 9.5% C) 10.4% D) 22.9% Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 234 Copyright 2010 Pearson Education, Inc. ! 9) Refer to Instruction 21.1. Should SureDrip take the discount offered by Sun Chemical? A) Yes, SureDrip will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days. B) No, SureDrip will not have to pay any interest if they just pay in 45 days. C) Yes, SureDrip's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%. D) No, it costs SureDrip 22.9% to accept the discount and they are better off paying the full amount in 45 days. Register to View AnswerDiff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 10) Days working capital is equal to A) days payables + days receivables - days inventory. B) days inventory + days receivables - days payables. C) days payables + days inventory + days receivables. D) none of the above Register to View AnswerDiff: 2 Topic: 21.5 Net Working Capital Skill: Analytical 11) Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because A) accounts receivable are so much longer than accounts payable. B) accounts payable are so much longer than accounts receivable. C) accounts receivable and accounts payable are equal. D) this doesn't really cause a problem; in fact it is to the benefit of the Norwegian subsidiary. Register to View AnswerDiff: 2 Topic: 21.5 Net Working Capital Skill: Conceptual T r u e/ F a l se 1) In principle, the firm tries to minimize its NWC balance. Register to View AnswerDiff: 1 Topic: 21.5 Net Working Capital Skill: Recognition 235 Copyright 2010 Pearson Education, Inc. ! 2) Other things equal, managers prefer a lower "days working capital" to a higher one. Register to View AnswerDiff: 1 Topic: 21.5 Net Working Capital Skill: Conceptual E ssa y 1) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones. Answer: Free-trade zones are locations within a country where foreign firms can store, assemble, or manufacture goods without paying an import duty until the goods are actually distributed. The authors provide the example of Toyota Motor Corporation exporting cars to the United States and storing them at a facility in Los Angeles. This allows Toyota to collect an inventory of cars in the states and to be more readily able to meet consumer demand for specific models. However, they do not pay any import duty until the cars are moved from the free-trade zone. A second example provided by the authors is that of Mercedes assembling automobiles in Alabama. Again, the parts are shipped to Alabama without being assessed an import duty until the assembled cars are distributed. And then, even though the cars are a finished products, the duty is assessed at a lower rate on the parts only. This also benefits the state of Alabama who now has a major employer in town. Finally, a manufacturing center is placed in a free-trade or industrial zone. Here, several companies can set up shop in an area designated for foreign manufacture. Most of the items produced will be exported out of that country and not have to pay any sort of import duty. However, the country will benefit from employment, the resulting tax revenues, and perhaps being able to supply some of the parts used in the manufacturing process. Diff: 3 Topic: 21.5 Net Working Capital Skill: Analytical 236 Copyright 2010 Pearson Education, Inc. ! 21.6 International Cash Management M u l t i p l e C hoi c e 1) Other things equal, a firm would rather have ________ in a depreciating currency, and ________ in an appreciating currency. A) accounts receivable; accounts payable B) accounts receivable; accounts receivable C) accounts payable; accounts receivable D) none of the above Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Conceptual 2) Which of the following is NOT a precautionary motive for holding cash? A) Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region. B) The firm has several short-term obligations in unhedged foreign currency-denominated contracts. C) The firm must pay ordinary wages in two days. D) All are precautionary motives. Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Conceptual 3) Increases to cash flows can be anticipated if which of the following occurs? A) A receivables contract is denominated in an appreciating foreign currency. B) Sales are less than anticipated. C) Days in accounts receivable increase by 15 days. D) none of the above Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Recognition 4) A centralized depository benefits the firm primarily by A) reducing the cost of repatriating funds. B) positioning profits where taxes are lowest. C) reducing the total amount of capital employed within the total firm. D) earning a higher rate of return than in domestic banking deposits. Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Recognition 237 Copyright 2010 Pearson Education, Inc. ! 5) The Clearing House Interbank Payment System (CHIPS) is A) the largest publicly operated payments system in the world. B) owned and operated by the world's seven largest central banks. C) a computerized network that connects banks globally. D) none of the above Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Recognition 6) An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is A) a centralized depository. B) a reinvoicing center. C) a cost center. D) a syndicated bank. Register to View AnswerDiff: 2 Topic: 21.6 International Cash Management Skill: Recognition 7) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity. A) Syndicated banking B) Centralized depositing C) Multilateral netting D) Debt cancellation Register to View AnswerDiff: 1 Topic: 21.6 International Cash Management Skill: Recognition T r u e/ F a l se 1) In an inflationary economy, demand for credit usually exceeds supply. Register to View AnswerDiff: 1 Topic: 21.6 International Cash Management Skill: Conceptual 2) For disbursement purposes, it is to the benefit of the firm to minimize float. Register to View AnswerDiff: 1 Topic: 21.6 International Cash Management Skill: Recognition 238 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository. Register to View Answercentral depository for cash management allows the parent firm to manage cash in a manner that maximizes the benefit to the entire firm rather than specific affiliates. Typically, a firm will order each affiliate to maintain only those cash balances necessary for its own transactions and to forward the balance to a centralized location. The central depository is typically located in a world money center where it has ready and inexpensive access to information. Central depositories can reduce the size of total precautionary funds for the MNE. If the need for precautionary funds by the affiliates is not perfectly correlated, a central pool of funds will be smaller than if each of the affiliates independently held their desired precautionary balances. Managers of a central pool of funds can seek out the lowest costs for borrowing required funds, and the highest rates for parking excess cash more efficiently than can affiliate managers who may be limited by local laws as to where they can put their funds. Finally, location is important for either cost purposes, such as low taxes or a physically central presence, or for access to information. Diff: 3 Topic: 21.6 International Cash Management Skill: Analytical 21.7 Financing Working Capital M u l t i p l e C hoi c e 1) A precautionary cash balance A) is used to replace spoiled or damaged inventory. B) is held to facilitate cash disbursements when receipts slow down. C) is used for normal day-to-day operations. D) is held for the benefit of a sister affiliate. Register to View AnswerDiff: 2 Topic: 21.7 Financing Working Capital Skill: Conceptual 2) An in-house bank A) is a separate bank chartered to operate within a business firm. B) is in fact a set of functions performed by the firm's existing treasury department. C) assesses the credit standing of the bank's customers. D) provides banking services for employees. Register to View AnswerDiff: 2 Topic: 21.7 Financing Working Capital Skill: Conceptual 239 Copyright 2010 Pearson Education, Inc. ! 3) A foreign banking office that is separately incorporated in the host country is A) a correspondent bank. B) a representative office. C) a bank subsidiary. D) an Edge Act corporation. Register to View AnswerDiff: 2 Topic: 21.7 Financing Working Capital Skill: Recognition T r u e/ F a l se 1) An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations. Register to View AnswerDiff: 1 Topic: 21.7 Financing Working Capital Skill: Recognition 2) Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent. Register to View AnswerDiff: 1 Topic: 21.7 Financing Working Capital Skill: Conceptual 3) Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions. Register to View AnswerDiff: 1 Topic: 21.7 Financing Working Capital Skill: Conceptual 240 Copyright 2010 Pearson Education, Inc. ! M u l t i n a t ion a l B usi n ess F i n a n c e , 12e ( E i t e m a n , e t a l) C h a p t e r 22 I n t e r n a t io n a l T r a d e F i n a n c e 22.1 The Trade Relationship M u l t i p l e C hoi c e 1) The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an A) unaffiliated known. B) affiliated party. C) unaffiliated unknown. D) any of the above Register to View AnswerDiff: 2 Topic: 22.1 The Trade Relationship Skill: Recognition 2) Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business? A) affiliated party B) unaffiliated unknown party C) known unaffiliated party D) domestic supplier Register to View AnswerDiff: 2 Topic: 22.1 The Trade Relationship Skill: Recognition 3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an A) unaffiliated known party transaction. B) unaffiliated unknown party transaction. C) affiliated party transaction. D) none of the above Register to View AnswerDiff: 2 Topic: 22.1 The Trade Relationship Skill: Conceptual 241 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) Today, international trade is dominated by transactions between unaffiliated parties (known or unknown). Register to View AnswerDiff: 1 Topic: 22.1 The Trade Relationship Skill: Recognition 2) Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex. Register to View AnswerDiff: 1 Topic: 22.1 The Trade Relationship Skill: Recognition 22.2 The Trade Dilemma M u l t i p l e C hoi c e 1) Which of the following is NOT a financial instrument that may be included in an international trade transaction? A) Letter of Credit B) Sight Draft C) Order bill of lading D) Federal funds transaction Register to View AnswerDiff: 2 Topic: 22.2 The Trade Dilemma Skill: Recognition T r u e/ F a l se 1) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land. Register to View AnswerDiff: 2 Topic: 22.2 The Trade Dilemma Skill: Recognition 242 Copyright 2010 Pearson Education, Inc. ! 22.3 Benefits of the System M u l t i p l e C hoi c e 1) The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following? A) The risk of noncompletion. B) The risk of foreign exchange risk (when combined with a various hedging techniques). C) The risk that financing will not be available due to foreign exchange risk. D) All of these risks are reduced when using these trade implements. Register to View AnswerDiff: 2 Topic: 22.3 Benefits of the System Skill: Recognition T r u e/ F a l se 1) If a foreign exchange 1/0450<13#4'<0%%5'2#/';0NG)41'34'18)'3G;#/1)/L5'<$//)4<N6'18)'):;#/1)/'805' the foreign exchange risk. Register to View AnswerDiff: 2 Topic: 22.3 Benefits of the System Skill: Recognition 22.4 Letter of Credit M u l t i p l e C hoi c e 1) Which of the following is NOT true regarding a letter of credit? A) The importer and exporter agree on a transaction. B) The importer applies to its local bank for the issuance of a letter of credit. C) The exporter applies to its local bank for the issuance of a letter of credit. D) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of the importer. Register to View AnswerDiff: 2 Topic: 22.4 Letter of Credit Skill: Recognition 243 Copyright 2010 Pearson Education, Inc. ! 2) A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment. A) irrevocable B) revocable C) confirmed D) unconfirmed Register to View AnswerDiff: 1 Topic: 22.4 Letter of Credit Skill: Recognition 3) A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit. A) irrevocable; unconfirmed B) revocable; confirmed C) confirmed; irrevocable D) unconfirmed; confirmed Register to View AnswerDiff: 2 Topic: 22.4 Letter of Credit Skill: Recognition 4) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________. A) exporter's; portfolio risk B) importer's; blocked foreign exchange C) exporter's; blocked foreign exchange D) none of the above Register to View AnswerDiff: 2 Topic: 22.4 Letter of Credit Skill: Recognition T r u e/ F a l se 1) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise. Register to View AnswerDiff: 1 Topic: 22.4 Letter of Credit Skill: Recognition 2) The primary advantage of a letter of credit is that it reduces risk. Register to View AnswerDiff: 1 Topic: 22.4 Letter of Credit Skill: Conceptual 244 Copyright 2010 Pearson Education, Inc. ! 3) The major advantage to the exporter of a letter of credit is that the exporter does not receive any funds until the documents have arrived at a local port or airfield. Register to View AnswerDiff: 2 Topic: 22.4 Letter of Credit Skill: Recognition E ssa y 1) Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade. Register to View Answerletter of credit (L/C) is a bank's conditional promise to pay issued by a bank at the request of an importer. The primary advantage of an L/C is the reduction in risk. This reduction in risk makes it easier for the exporter to sell goods to the importer because it no longer need rely on the ability of the importing firm to pay for the goods, but rather it can rely on the bank. There are three primary parties involved with a letter of credit. Party number one is the exporter, who makes a sale to the importer in exchange for the bank's L/C. Party number two is the importer who receives the goods and promises to pay the bank. And third, the bank that contracts with the importer and agrees to pay the exporter upon presentation of documents as specified in the L/C. The advantage to an exporter is the increased likelihood of receiving payment because funds are due from a known international commercial bank as opposed to a relatively unknown importer. Furthermore, an exporter with a good reputation for delivery may be able to sell the L/C at a discount in the secondary market prior to shipping and speed up cash flow. The importer benefits because it doesn't need to pay for goods purchased until they actually reach port. The bank benefits from the fees they charge. Diff: 3 Topic: 22.4 Letter of Credit Skill: Conceptual 22.5 Draft M u l t i p l e C hoi c e 1) The draft is the instrument normally used in international commerce to A) transfer product. B) prove ownership. C) transfer title. D) initiate the sale. Register to View AnswerDiff: 1 Topic: 22.5 Draft Skill: Recognition 245 Copyright 2010 Pearson Education, Inc. ! 2) The ________ is the instrument normally used to actually effect payment in international commerce. A) banker's acceptance B) bill of exchange C) bill of lading D) letter of credit Register to View AnswerDiff: 1 Topic: 22.5 Draft Skill: Recognition 3) The person or company initiating the draft or bill of exchange is known as the A) maker. B) drawer. C) originator. D) any of the above Register to View AnswerDiff: 2 Topic: 22.5 Draft Skill: Recognition 4) The person or company to whom the draft or bill of exchange is addressed is the A) drawee. B) drawer. C) maker. D) originator. Register to View AnswerDiff: 2 Topic: 22.5 Draft Skill: Recognition 5) Drafts that have been accepted by banks become A) clean drafts. B) nonmarketable. C) banker's acceptances. D) none of the above Register to View AnswerDiff: 1 Topic: 22.5 Draft Skill: Recognition 246 Copyright 2010 Pearson Education, Inc. ! T r u e/ F a l se 1) A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment. Register to View AnswerDiff: 1 Topic: 22.5 Draft Skill: Recognition 22.6 Bill of Lading (B/L) M u l t i p l e C hoi c e 1) Which of the following purposes is NOT served by the bill of lading? A) It acts as a receipt. B) It acts as a contract. C) It acts as a document of title. D) It acts as all of the above. Register to View AnswerDiff: 1 Topic: 22.6 Bill of Lading (B/L) Skill: Recognition 2) The ________ is issued to the exporter by a common carrier transporting the merchandise. A) bill of lading B) draft C) banker's acceptance D) line of credit Register to View AnswerDiff: 1 Topic: 22.6 Bill of Lading (B/L) Skill: Recognition 3) A straight bill of lading is most likely to be used under which of the following circumstances? A) when the merchandise has not been paid for in advance B) when the transaction is being financed by a bank C) when the shipment is to an affiliate D) none of the above Register to View AnswerDiff: 2 Topic: 22.6 Bill of Lading (B/L) Skill: Conceptual 247 Copyright 2010 Pearson Education, Inc. ! 22.7 Example: Documentation in a Typical Trade Transaction M u l t i p l e C hoi c e 1) In a typical international trade transaction, the order of activity would be which of the following? A) The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The buyer's bank submits payment to the manufacturer's bank. B) The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance. C) The foreign buyer places an order; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank. D) The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The foreign buyer places an order; The buyer's bank submits payment to the manufacturer's bank. Register to View AnswerDiff: 1 Topic: 22.7 Example: Documentation in a Typical Trade Transaction Skill: Recognition T r u e/ F a l se 1) Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management. Register to View AnswerDiff: 1 Topic: 22.7 Example: Documentation in a Typical Trade Transaction Skill: Recognition 22.8 Government Programs to Help Finance Exports M u l t i p l e C hoi c e 1) The Export-Import Bank is an independent agency of the U.S. government established in 1934 to A) ship money abroad. B) import agricultural products during the recession. C) facilitate and stimulate foreign trade of the United States. D) none of the above Register to View AnswerDiff: 2 Topic: 22.8 Government Programs to Help Finance Exports Skill: Recognition 248 Copyright 2010 Pearson Education, Inc. ! 2) In the United States, the Foreign Credit Insurance Corporation A) is a subsidiary of the Export-Import Bank. B) provides letters of credit for U.S. importers. C) provides letters of credit for U.S. exporters. D) provides policies that protect U.S. exporters against default by foreign importers. Register to View AnswerDiff: 2 Topic: 22.8 Government Programs to Help Finance Exports Skill: Recognition T r u e/ F a l se 1) The Foreign Credit Insurance Association is a branch of the U.S. federal government. Register to View AnswerDiff: 1 Topic: 22.8 Government Programs to Help Finance Exports Skill: Recognition 22.9 Trade Financing Alternatives M u l t i p l e C hoi c e I n s t r u c t i o n 22 . 1 : U se t h e i n f o r m a t ion to a n sw e r t h e f ol l ow i n g q u est ion (s). Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum. 1) Refer to Instruction 22.1. What is the size of the commission Jackson Automotive will pay the bank for the banker's acceptance? A) $7,000 B) $5,000 C) $12,000 D) $14,000 Register to View AnswerDiff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Analytical 249 Copyright 2010 Pearson Education, Inc. ! 2) Refer to Instruction 22.1. What is the size of the discount (not including the commission fee) Jackson must take for receiving the proceeds of the sale today rather than waiting for six months? A) $7,000 B) $5,000 C) $12,000 D) $14.000 Register to View AnswerDiff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Analytical 3) Refer to Instruction 22.1. What is the total Jackson Automotive can expect to receive if the firm takes payment today? A) $993,000 B) $995,000 C) $988,000 D) $996,000 Register to View AnswerDiff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Analytical 4) Refer to Instruction 22.1. ________ is an unsecured promissory note. A) A banker's acceptance B) An overdraft C) A securitized loan D) Commercial paper Register to View AnswerDiff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Recognition 5) Custom Granite Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative? A) 14.82% B) 13.00% C) 12.00% D) 9.09% Register to View AnswerDiff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Analytical 250 Copyright 2010 Pearson Education, Inc. ! E ssa y 1) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter? Register to View Answerdraft, or bill of exchange, is a written order from the exporter telling the importer when and how much to pay. When properly contracted, a draft can become a negotiable instrument and trade in the secondary market. If the draft provides a specific payment date and is presented to the importer's bank, it becomes a banker's acceptance (BA) and the bank makes an unconditional promise to make payment upon maturity. A BA may sell in the secondary market like any other marketable security and the holder need not wait until maturity to liquidate. Thus, BAs facilitate trade by reducing risk and potentially speeding cash flows to the exporter. Diff: 3 Topic: 22.9 Trade Financing Alternatives Skill: Conceptual 22.10 Forfaiting: Medium- and Long-Term Financing M u l t i p l e C hoi c e 1) ________ is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government is perceived by the exporter to be too risky for open account credit. A) Forfitting B) Marketable Bank Shares C) Forfaiting D) Banker's Acceptances Register to View AnswerDiff: 1 Topic: 22.10 Forfaiting: Medium- and Long-Term Financing Skill: Recognition T r u e/ F a l se 1) In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk. Register to View AnswerDiff: 1 Topic: 22.10 Forfaiting: Medium- and Long-Term Financing Skill: Recognition 251 Copyright 2010 Pearson Education, Inc. !

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MIDTERM EXAM, SUMMER 2011, INTL CORP FINPROF HARVEY PONIACHEK(Answer All)1. 2.16 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciatesagainst the dollar bya.60%b.75%c.125%d.300%ANSWER:a Setting the equilibr
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Syllabus &amp; CalendarRutgers Business School, Dept of Finance &amp; EconomicsProf. Harvey Poniachek, Fin 33.390.375.01, Global Money Markets &amp; InstitutionsSpring 2013, W 12:00-1:20 &amp; F 1:40-3:00 PM, LSH B 105harvey.poniachek@business.rutgers.eduOffice 135-
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A Necrology of Defunct or Renamed U.S. Stock ExchangesSource:Consolidation in the Global Equity Market: An Historical PerspectiveBy James Angel Baltimore Stock ExchangeMerged with Philadelphia in 1949. Boston Curb ExchangeClosed in 1935 subsequent
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A New Wrinkle in OptionsBy Jane J. Kim18 September 2010The Wall Street Journal (Online and Print)Short-term weekly option contracts are gaining traction among investorseven thoughtheir volatility can make it easier to lose money.Unlike standard opti
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As Exchanges Become Profit-Seekers Concerns Rise Over Risk toInvestorsBy AARON LUCCHETTIStaff Reporter of THE WALL STREET JOURNALNovember 8, 2005; Page C1As the nation's stock-trading platforms morph from not-for-profit cooperatives into publicly tra
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As Market Heats Up Trading Slips Into ShadowsBy NATHANIEL POPPER1 April 2013New York TimesWall Street is embracing its dark side.As the stock market continues to climb, trading has increasingly migrated fromestablished bourses like the New York Stoc
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At Changed Merc, The Boss Creates Exchange ModelDonohue and His Team Study Expansion and New Products; Investments Based on Snowfall?By PETER A. MCKAY and AARON LUCCHETTIFebruary 25, 2006; Page B1These days, Craig Donohue has had more to talk about th
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Bankers Hope For a Reprise Of Bowie BondsBy KAREN RICHARDSONStaff Reporter of THE WALL STREET JOURNALAugust 23, 2005; Page C1The boom in digital downloads is music to the ears of bankers and others hoping to start shifting &quot;Bowiebonds&quot; again.These b
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Barclays Leaves LME RingBy Francesca Freeman24 November 2012The Wall Street JournalB12LONDON - One of the biggest traders on the London Metal Exchange, Barclays PLC,downgraded its membership in a move that will see its traders leave Europe's last op
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BATS Direct Edge to Merge - Stock Deal Would Displace Nasdaq OMX as SecondLargest Exchange OperatorJacob BungeBy Jacob Bunge738 words27 August 2013The Wall Street JournalJC3English(Copyright (c) 2013, Dow Jones &amp; Company, Inc.)BATS Global Market
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BOOMTOWN The Ubiquitous Ticker Gives You a Warm Glow, But No Real InformationBy Lee Gomes885 words7 October 2002The Wall Street JournalA19English(Copyright (c) 2002, Dow Jones &amp; Company, Inc.)MOST OLD TECHNOLOGIES, once they are no longer needed,
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Borsa Italiana And London Stock Exchange Group To Merge - Creates EuropesLeading Diversified Exchange Group23/06/07The Boards of Borsa Italiana S.p.A. (Borsa Italiana) and London Stock Exchange Group plc(London Stock Exchange) today announce that they
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Brazil Bourse Aims to Open Region's DoorBy A LASTAIR STEWARTSEPTEMBER 17, 2009SO PAULO - Brazilian financial exchange BM&amp;FBovespa SA is pursuing accords with itscounterpart bourses in Chile, Colombia and Peru that will allow for cross-trading of stock
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Burgundy To Continue Its Nordic Growth With Oslo BrsDate 16/10/2012Together with Burgundy, Oslo Brs will offer a competitive and effective alternative inthe Nordics. The Nordic owners of the Swedish exchange Burgundy have entered intoan agreement for
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China s Self Styled Nasdaq Shines in DebutWith Stocks' Gains Ranging From 76% to 210%, However, SomeObservers Fear Speculative BubbleBy S HEN HONGOCTOBER 31, 2009ReutersCompany delegates of ChiNext ring the bell in Shenzhen, Guangdong province Octob
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CME Group To Acquire Kansas City Board Of TradeDate 17/10/2012CME Group, the world's leading and most diverse derivatives marketplace, and theKansas City Board of Trade, the leading futures market for hard red winter (HRW)wheat, today announced they h
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CME Group To Launch Rainfall ContractsIn Nine U.S. Cities14/10/10CME Group, the world's leading and most diverse derivatives marketplace, announced today thatit will begin listing and trading rainfall futures, options on futures and binary options beg
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CME to Launch European ExchangeBy Michelle Price and Jacob Bunge20 August 2012The Wall Street JournalCME Group Inc. plans to launch its first exchange outside the U.S., a European derivatives hubthat would compete with rivals run by NYSE Euronext and
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CME-Nymex: Good Deal?An $11 Billion Tie-Up Of Commodities Markets Raises Hopes, ConcernsBy AARON LUCCHETTI and ANN DAVISJanuary 29, 2008; Page C1The commodities boom is intensifying the merger mania racing through the world's financialexchanges. But
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Mergers: Commission blocks proposed merger betweenDeutsche Brse and NYSE EuronextBrussels,01February2012TheEuropeanCommissionhasprohibited,onthebasisoftheEUMerger Regulation,theproposedmergerbetweenDeutscheBrseandNYSEEuronext,asitwouldhaveresultedinaq
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Cooling the Pits: ICE Yelling EndsBy Leslie Josephs19 October 2012The Wall Street Journal OnlineAugustine Lauria knew his 37-year career as a floor trader was over when he got a memo fromIntercontinentalExchange Inc. in late July announcing the closi
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Cubs Chicago Board Options Exchange (CBOE) Offer First-Ever Auction OfCubs Season Tickets - CBOE Sponsorship Includes Naming Rights To NewSeats At Wrigley Field25/02/08The Chicago Cubs today unveiled plans for a first-ever auction of season tickets to
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Dark Markets Traders Navigate a Murky New WorldBy Scott Patterson and Jenny Strasburg9 April 2012The Wall Street JournalA1For a sense of how murky the financial markets can be these days, consider the case of PipelineTrading Systems LLC.Using softw
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Deal Boosts CME s Bet on DubaiBy Nikhil Lohade, Tim Falconer and Jacob Bunge22 February 2012The Wall Street JournalC3(Copyright (c) 2012, Dow Jones &amp; Company, Inc.)CME Group Inc. said it will double its stake in the Dubai Mercantile Exchange to 50%,
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Deutsche Bank Goes Live With SponsoredAccess On NASDAQ OMX Nordic11/11/10NASDAQ OMX (NASDAQ:NDAQ) announces that Deutsche Bank will start offering lowlatency Sponsored Access to the NASDAQ OMX Nordic exchanges in Stockholm, Helsinki,Copenhagen and Ic
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Deutsche Brse Offers Insight Into XetraOrder Book - Xetra Transparency Also ForPrivate Investors20/01/09Deutsche Brse has opened up the Xetra order book, offering swift insight into its fullyelectronic trading system. Visitors to the investor portal
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Deutsche Boerse AG And NYSE Euronext Agree To Combine To Create The PremierGlobal Exchange GroupDate 15/02/2011 Creates a world leader in derivatives and risk management and the premierglobal venue for capital raising Combined group to offer clients
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Does High Speed Trading Hurt the Small Investor?Four experts say faster is often better. But they also have concerns.By JACOB BUNGEWall Street Journal OCTOBER 10, 2011The rise of high-frequency-trading firms, which use statistics and algorithms to dri
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Dubai Financial Market To Become The First International IslamicStock Market - Committee Of Islamic Scholars To SuperviseSharia Compliance - Committee Issues Fatwa, Sanctioning DFMIPO And Trading Of Its Shares08/11/06Dubai Financial Market today anno
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Ethiopia Taps Grain Exchange In Its Battle on HungerBy ROGER THUROWFebruary 27, 2008; Page A1MOJO, Ethiopia - This country has some of Africa's most fertile land, with fields of wheat and corn stretching to thehorizon. Yet a few years ago, 14 million
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EU Set to Endorse Code to Simplify Stock SettlementsBy ADAM BRADBERYOctober 30, 2006; Page C3LONDON - The European Commission expects to endorse in early November a code ofconduct for European stock exchanges and companies in a bid to reduce the cost
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Eurex Faces Difficulties In U.S. FuturesMarket305 words2 July 2003The Wall Street JournalA11English(Copyright (c) 2003, Dow Jones &amp; Company, Inc.)In your June 17 article &quot;Futures Exchanges Facing Showdown with Europe's Eurex,&quot;Eurex's entry into U
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Eurex Launches Initiative To Attract NewParticipants - New Incentive ProgramLowers Transaction And Connection CostsIn The First Year After Admission29/01/09The international derivatives exchange Eurex announced today that it is to launch an enhanced
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Euronext Chief Predicts Only 2 or 3 Exchanges Will DominateBy ALISTAIR MACDONALDJanuary 23, 2007; Page C3Trading in financial markets will be dominated by two or three global exchanges operating across continents withinyears, said Jean-Franois Thodore
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European Exchanges Battle Goes High-TechBy L UKE JEFFS and D IGBY LARNERSEPTEMBER 17, 2009London Stock Exchange Group PLC and Chi-X Europe Ltd. struck deals that will upgrade the technology of theirtrading systems, raising the stakes in the battle for
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Exchanges Offer Varying Views As Regulators Discuss TurfBy Kara Scannell517 words3 September 2009The Wall Street JournalJC3English(Copyright (c) 2009, Dow Jones &amp; Company, Inc.)WASHINGTON - The heads of major exchanges offered diverging views on
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Exchanges Tango in EuropeSome Euronext Holders PreferDeutsche Boerse as Merger PartnerBy DAVID REILLYStaff Reporter of THE WALL STREET JOURNALSeptember 19, 2005; Page C12LONDON - The merger dance under way for nearly a year among Europe's three top
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Extreme Makeover Big Board EditionBy J ACOB BUNGE and R ANDALL SMITHOCTOBER 9, 2009As any TV star knows, it takes work to look good for the camera. That is one reason why NYSEEuronext has committed to an 18-month, $5 million face-lift for the 100-year
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Family Blames AIG In Bet on Mom's Life - Suit Faults Insurer's UnderwritingBy Leslie Scism and Mark Maremont807 words23 July 2010The Wall Street JournalC6English(Copyright (c) 2010, Dow Jones &amp; Company, Inc.)A dispute over a huge life-insurance po
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For Kuwaiti Women A Day at the Market Means BuyingStockAs Middle East Shares Soar, Exchanges Open Doors; 'They Don't Speculate'By YASMINE EL-RASHIDIStaff Reporter of THE WALL STREET JOURNALAugust 8, 2005; Page A1KUWAIT CITY - From a balcony overlook
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For Superfast Stock Traders a Way to Jump Ahead in LineBy Scott Patterson and Jenny Strasburg19 September 2012The Wall Street Journal , page A1Copyright 2012 Dow Jones &amp; Company, Inc. All Rights Reserved.Haim Bodek was a Wall Street insider at Goldma
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FrankfurtStockExchangeAllocatesIndividualOrderBooksBasedOnPerformanceAsOfJulyMoreCompetitionBetweenLead BrokersRaisesQualityForPrivateInvestorsOpportunityForNewPerformanceOrientedLeadBrokersGoalAlsoToAttract InternationalSpecialistsIntroductionOfOrderBo
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From Norway, Covered Bonds for U.S. InvestorBy Prabha Natarajan20 October 2010, p. C15The Wall Street Journal (Online and Print)Copyright 2010 Dow Jones &amp; Company, Inc. All Rights Reserved.NEW YORKWith U.S. mortgage bonds scarce as the housing market
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Futures Markets Are Both Players And Referees'Self Regulators' Spit Out Edicts; Disputes Arise Over Who Benefits And What Are the True MotivesBy PETER A. MCKAYStaff Reporter of THE WALL STREET JOURNALJanuary 25, 2005; Page C1Given additional authorit
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Germany s Secret Funding Weapon Tightly Regulated Covered Bond Has Kept Nation sLenders in the GameBy William BostonWSJ1 December 2010BERLINFinancing for property acquisitions may still be tight in Europe, but German bankshave been among the most ac
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Hill Peers Into Market s Fast Lane - Former Insider to Testify on High-Speed TradingTechniques He Says Leave Ordinary Investors BehindBy Scott Patterson20 September 2012The Wall Street JournalC1WASHINGTON - An insider of the secretive world of high-
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HKEx Makes Recommended Cash Offer For The London Metal ExchangeDate 15/06/2012The board of Hong Kong Exchanges &amp; Clearing Limited (HKEx) is pleased toannounce that on 15 June 2012, HKEx, HKEx Investment (UK) Limited (HKExInvestment) and LME Holdings L
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Hong Kong Exchange Gets a Boost From Chinafor NowHigh trading expenses and weakness in technology may undermine growthWall Street Journal OCTOBER 10, 2011By KATE O'KEEFFEWith its high trading costs, aging technology and history of bucking a decade-lon
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How Hide Not Slide Orders WorkBy Scott Patterson and Jenny Strasburg19 September 2012Wall Street Journal p. A12A basic principle of U.S. stock exchanges is that the first investor to place an order at the bestcurrent price generally should be the one
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ICE Again to Test CME DominanceAtlanta Exchange Operator to Offer Futures, Options Contracts on Some CoreAgricultural ProductsBy Ian Berry and Owen Fletcher13 April 2012The Wall Street JournalC4Intercontinental Exchange Inc. plans to launch challen
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ICE Futures Europe Announces Approval For Screens In BrazilDate 02/03/2011Intercontinental Exchange (NYSE: ICE), a leading operator of regulated global futuresexchanges, clearing houses and over-the-counter (OTC) markets, announced the authorisationby
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In Russia, It's a StartThe merger of two Moscow exchanges is a first step to becoming a financial hub. Butthere's plenty more to do.Wall Street Journal OCTOBER 10, 2011By POLYA LESOVAMoscow has a lot riding on a new exchange.The city's RTS and Micex
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In the Zone; U.S. Joins Rest of World with Limit Up/Limit DownBy Peter Chapman1850 words1 July 2012Traders MagazineTRDR26Vol.25, No.339English(c) 2012 Traders Magazine and SourceMedia, Inc. All rights reserved.The Germans have it. The British ha
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Inside Exchanges Race To Invent New BetsAmid a Merger Wave, They Seek Products With Fatter MarginsBy AARON LUCCHETTI and ALISTAIR MACDONALDJuly 6, 2007; Page A1To understand why financial markets from Chicago to Sydney are scrambling to merge with eac
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Islamic Banks Get a Libor of Their OwnBy Katy Burne25 November 2011The Wall Street JournalC4(Copyright (c) 2011, Dow Jones &amp; Company, Inc.)A group of 16 banks resolved a quandary that has dogged the $1 trillion Islamicfinancing market for nearly th
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Islamic Bond Market Becomes Global By Attracting Non MuslimBorrowersBy KAREN LANENovember 16, 2006; Page C1SINGAPORE - When Texas-based energy firm East Cameron Partners wanted to raise cash thisyear, it turned not to banks or the domestic bond marke