2. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time. (Points :10)
3. The Bretton Woods Agreement is a 1988 accord between 12 countries to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. (Points :10)
4. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be _____. (Points :10)
none of the above
5. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) _______ in the value of the British pound with respect to _______, other things being equal. (Points :10)
increase; U.S. dollar
increase; nondollar currencies
decrease; nondollar currencies
decrease; U.S. dollar
6. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of ?200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell ?200,000 forward in three months. The spot rate of the euroon September 1 is $1.15. Graylon will receive $_________ for the euros. (Points :10)
7. The shorter the time to the expiration date for a currency, the _______ will be the premium of a call option, and the _______ will be the premium of a put option, other things equal. (Points :10)
8. An option writer is the seller of a call or a put option. (Points :10)
9. The forward premium is the price specified in a call or put option. (Points :10)
10. Which of the following is not true regarding Thailand? (Points :10)
Thailand was one of the slowest growing countries over the 1985-1994 period.
High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand's local interest rate.
Thailand's baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
All of the above are true.
11. The term "target zone arrangement" refers to a: (Points :10)
situation where countries adjust their national economic policies to maintain exchange rates within some predetermined limits.
system where several central banks act in a coordinated intervention to keep the price of one country's currency within reasonable trading ranges.
system where currencies are pegged to gold, or to hard currency.
system where local currencies are replaced by dollars.
12. Which of the following are true about the Southeast Asian currency crisis? (Points :10)
It was preceded by several years of large capital inflows to Asia.
It was preceded by a five-year recession in Asia.
Asian interest rates declined during the crisis.
Asian exchange rates were converted from floating to fixed to resolve the crisis.
13. Market forces are the determinant of exchange rates in a freely floating exchange rate system. (Points :10)
14. The Smithsonian Agreement was reached in September 1985 by seven major industrialized countries to systematically weaken the dollar. (Points :10)
15. Assume the following information:
U.S. investors have $1,000,000 to invest
1-year deposit rate offered by U.S. banks = 12%
1-year deposit rate offered on Swiss francs = 10%
1-year forward rate of Swiss francs = $.62
Spot rate of Swiss franc = $.60
Given this information: (Points :10)
interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.
16. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about _______ the U.S. inflation rate, and the British pound is expected to _______. (Points :10)
2 percentage points above; depreciate by about 2%
3 percentage points above; depreciate by about 3%
3 percentage points below; appreciate by about 3%
3 percentage points below; depreciate by about 3%
2 percentage points below; appreciate by about 2%
17. Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of: (Points :10)
interest rate parity.
purchasing power parity.
the exchange rate mechanism.
18. Jacko Co. is a U.S.-based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk? (Points :10)
the firms have about the same level of exposure.
neither firm has any exposure.
19. Appreciation in a firm's local currency causes a(n) __________ in cash inflows and a(n) _________ in cash outflows. (Points :10)
20. Two highly negatively correlated currencies act almost as if they are the same currency. (Points :10)
21. When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low. (Points :10)
22. Countries that became part of the European Union in 2004 had high labor and production costs and therefore were not targeted for new DFI by MNCs that wanted to reduce manufacturing costs. (Points :10)
23. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use: (Points :10)
a risk-adjusted discount rate.
24. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ________. (Points :10)
none of the above, as the firm is not exposed
25. Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target? (Points :10)
differences in the timing of remittances from the target to the parent.
differences in the desired use of the target.
differences in the local risk-free interest rate.
differences in the ability to use financial leverage.
The solution answers International Financial Management Multiple Choice and T/F Questions