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International financial management multiple choice questions

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Question 1: Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 9%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
A) $238,294.
B) $232,591
C) $234,000.
D) $236,127.

Question 2: Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90 day forward rate is $.645. Kramer has developed the following probability distribution for the spot rate in 90 days:

Possible Spot Rate
in 90 Days Probability
$.61 10%
$.63 20%
$.64 40%
$.65 30%

The probability that the forward hedge will result in more dollars received than not hedging is:
A) 10%.
B) 20%.
C) 30%.
D) 50%.
E) 70%.

Question 3: FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.70, what is the net amount paid, assuming FAB wishes to minimize its cost?
A) 142,000
B) 144,000
C) 146,000
D) 150,000

Question 4: Samson Inc. needs ?1,000,000 in 30 days. Samsong can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 5 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?
A) $952,381.
B) $995,851.
C) $943,396.
D) $995,025.

Question 5. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it _______ determine which hedge is preferable before implementing the hedge. It _______ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot

Question 6: Springfield Co., based in the U.S., has a cost from orders of foreign material that is less than its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would _______ a stronger dollar and would _______ a weaker dollar.
A) benefit from; be unaffected by
B) benefit from; be adversely affected by
C) be unaffected by; be adversely affected by
D) be unaffected by; benefit from
E) be adversely affected by; benefit from

Question 7: Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso denominated expenses amount to MXP61 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso denominated expenses by MXP19 million and increase dollar denominated expenses by $1,800,000. This strategy would _______ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.
A) reduce; high
B) reduce; low
C) increase; low
D) increase; high

Question 8: Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _______, which would be _______ than the gain generated by the forward contract.
A) loss; smaller
B) loss; larger
C) gain; larger
D) gain; smaller

Question 9: Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
A) closing down most of its plants in the U.S.
B) producing more automobiles in the U.S.
C) relying completely on Japanese suppliers for its parts.
D) pricing its exports in dollars.

Question 10. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be _______. A firm would benefit _______ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.
A) high and positive; more
B) close to zero; more
C) high and positive; less
D) close to zero; less

Question 11: Which of the following firms is not exposed to translation exposure?
A) firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent.
B) firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden; the parent covers at least some of these losses.
C) firm Z, with a fully owned subsidiary that generates substantial earnings in Germany; the subsidiary never remits earnings but reinvests them in Germany.
D) all of these firms are exposed to translation exposure.

Question 12: Consider Firm "A" and Firm "B" that both produce the same product. Firm "A" would more likely have more stable cash flows if its percentage of foreign sales were _______ and the number of foreign countries it sold products to was _______.
A) higher; large
B) higher; small
C) lower; small
D) lower; large

Question 14. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
A) a risk adjusted discount rate.
B) payback period.
C) certainty equivalents.
D) simulation.

Question 15: Direct foreign investment is perceived by foreign governments to:
A) be a cause of national problems.
B) be a remedy for national problems.
C) be a cause and a remedy for national problems.
D) have no impact on national problems.

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Question 1: Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 9%
New Zealand dollar forward rate for 1 year = $0.40
New Zealand dollar spot rate = $0.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
A) $238,294.00
B) $232,591
C) $234,000.00
D) $236,127.00

Answer: A) $238,294.00
For money market hedge, borrow the present value of NZ$ 600,000
NewZealand borrowing rate = 9%
Therefore, present value= 550,458.72 =600,000 / (1+ 9.%)
At the end of 1 year NZ$ 600,000 will have to be returned (principal + interest)
This can be done using the earnings received from exports

Convert NZ$ 550,458.72 into US $ @ $0.39
Amount received= $214,678.90 =550,458.72 x .39
Deposit $214,678.90 @ 11% for 1 year
Amount in US $ received at the end of 1 year= $238,294.00 =214,678.9 x (1+ 11.%)

Money market hedge involves borrowing and lending in different currencies, to eliminate currency risk. It locks in the value of foreign currency in home currency units.

Question 2: Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90‑day forward rate is $.645. Kramer has developed the following probability distribution for the spot rate in 90 days:

Possible Spot Rate
in 90 Days Probability
$0.61 10%
$0.63 20%
$0.64 40%
$0.65 30%

The probability that the forward hedge will result in more dollars received than not hedging is:
A) 10%.
B) 20%.
C) 30%.
D) 50%.
E) 70%.

Answer: E) 70%.
Forward hedge will result in more dollars received than not hedging when the 90 day spot rate is less than $ 0.645
(As the forward hedge will lock a price of $0.645 / SF)

Probability of this happeneing = 10% + 20% + 40% = 70%

Question 3: FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.70, what is the net amount paid, assuming FAB wishes to minimize its cost?
A) 142,000
B) 144,000
C) 146,000
D) 150,000

Answer: A) 142,000

A call option has to be purchased to hedge the payable. (A call option will purchase the Canadian dollars)
A call option will be exercised if the ...

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Answers International financial management multiple choice questions.

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International Finance multiple-choice questions : options, inflation, WACC, hedging, futures, interest rate parity etc.

1. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = $.61
Premium = $.02
Spot rate = $.60
Expected spot rate in 30 days = $.56
30 day forward rate = $.62

a. $630,000.
b. $610,000.
c. $600,000.
d. $590,000.
e. $580,000.

2. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.
c. a decreased U.S. demand for euros and a decreased supply of euros for sale.
d. an increased U.S. demand for euros and a decreased supply of euros for sale.

3. The Single European Act of 1987:
a. reduced competition in most industries.
b. eliminated competition in many industries.
c. reduced efficiency in most industries.
d. increased competition in most industries.

4. When computing the weighted average cost of capital, the weighting should be proportional based on the ______ rather than the _____ value of the firm.
a. book, market
b. hypothetical, book
c. market, analyst's
d. market, book

5. When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are _______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are __________ affected.
a. favorably; favorably affected but by a smaller degree
b. favorably; favorably affected by a higher degree
c. unfavorably; favorably affected
d. favorably; unfavorably affected

6. Which one of the following areas is NOT a way companies often respond to exchange rate risk when they alter their product strategy?
a. shifting the firm's manufacturing base to another country
b. the timing of new-product introduction
c. changing the size of its product line
d. product innovation with advanced technology

7. The real cost of hedging payables with a forward contract equals:
a. the nominal cost of hedging minus the nominal cost of not hedging.
b. the nominal cost of not hedging minus the nominal cost of hedging.
c. the nominal cost of hedging divided by the nominal cost of not hedging.
d. the nominal cost of not hedging divided by the nominal cost of hedging.

8. Which of the following would likely have the least direct influence on a country's current account?
a. inflation.
b. national income.
c. exchange rates.
d. tariffs.
e. a tax on income earned from foreign stocks.

9. Over time, international trade (exports plus imports) as a percentage of GDP has:
a. increased for most major countries.
b. decreased for most major countries.
c. stayed about constant for most major countries.
d. increased for about half the major countries and decreased for the others.

10. A perfect hedge (full coverage) on translation exposure can usually be achieved when:
a. using the money market hedge.
b. using the forward hedge.
c. using the futures hedge.
d. none of the above, since a perfect hedge is nearly impossible.

11. A recent study by McKinsey & Co. found that investors assign a higher value to firms that exhibit ________ corporate governance standards and are likely to ________ ethical constraints.
a. high; not obey
b. high; obey
c. low; not obey
d. low; obey

12. If the current 180 day inter-bank Eurodollar rate is 15% (all rates are stated on an annualized basis. and next period's LIBOR is 13%, then a Eurocurrency loan priced at LIBOR plus 1% will cost
a. 16% this period and 16% next period
b. 15% this period and 14% next period
c. 16% this period and 14% next period
d. 15% this period and 15% next period

13. _______is not a factor that affects the bid/ask spread.
a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread

14. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars.
b. about .3977 Canadian dollars.
c. about 2.36 Canadian dollars.
d. about 2.51 Canadian dollars.

15. _______ is not a bank characteristic important to customers in need of foreign exchange.
a. Quote competitiveness
b. Speed of execution
c. Forecasting advice
d. Advice about current market conditions
e. All of the above are important bank characteristics to customers in need of foreign exchange.

16. Which of the following is not an advantage resulting from the Asian crisis that would favor direct foreign investment in Asia?
a. strong local demand for products.
b. low production costs.
c. weak local currencies.
d. all of the above are advantages.

17. LIBOR is:
A) the interest rate commonly charged for loans between banks.
B) the average inflation rate in European countries.
C) the maximum loan rate ceiling on loans in the international money market.
D) the maximum deposit rate ceiling on deposits in the international money market.
E) the maximum interest rate offered on bonds that are issued in London.

18. Futures contracts are typically _______; forward contracts are typically _______.
A) sold on an exchange; sold on an exchange
B) offered by commercial banks; sold on an exchange
C) sold on an exchange; offered by commercial banks
D) offered by commercial banks; offered by commercial banks

19. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ________ by _______%.
A) depreciated; 5.80
B) depreciated; 4.00
C) appreciated; 5.80
D) appreciated; 4.00

20. An increase in U.S. interest rates relative to German interest rates would likely ________ the U.S. demand for euros and _________ the supply of euros for sale.
A) reduce; increase
B) increase; reduce
C) reduce; reduce
D) increase; increase

21. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:

Currency Lending Rate Borrowing Rate
Dollars 7.10% 7.50%
New Zealand dollar (NZ$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast if correct, what will its dollar profit be from speculation over the five day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?
A) $521,325.
B) $500,520.
C) $104,262.
D) $413,419.
E) $208,044.

22. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:
A) an increased demand for British pounds.
B) a decrease in the demand for British pounds.
C) an increase in the supply of British pounds for sale.
D) a decrease in the supply of British pounds for sale.

23. Which of the following is an example of economic exposure but not an example of transaction exposure?
A) An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B) An increase in the pound's value increases the U.S. firm's cost of British pound payables.
C) A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
D) A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

24. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:
A) definitely be above the 180 day forward rate.
B) definitely be below the 180 day forward rate.
C) be about the same as the 180 day forward rate.
D) none of the above; there is no relation between the futures and forward prices.

25. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
A) purchase Canadian dollars forward.
B) purchase Canadian dollar futures contracts.
C) purchase Canadian dollar put options.
D) purchase Canadian dollar call options.

26. A firm will likely benefit most from diversifying if:
A) the correlations between country economies are high.
B) the correlations between country economies are low.
C) the variability of all country economy levels is high.
D) B and C

27. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid ask percentage spread is:
A) about 4.44%.
B) about 4.26%.
C) about 4.03%.
D) about 4.17%.

28. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:
A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate.
B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate.
C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate.
D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

29. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.
A) upward
B) downward
C) no
D) upward or downward (depending on the size of the deficit)

30. Forward contracts:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.

31. _____________ are most commonly classified as a direct foreign investment.
A) Foreign acquisitions
B) Purchases of international stocks
C) Licensing agreements
D) Exporting transactions

32. Which of the following is true?
A) Most forward contracts between firms and banks are for speculative purposes.
B) Most future contracts represent a conservative approach by firms to hedge foreign trade.
C) The forward contracts offered by banks have maturities for only four possible dates in the future.
D) none of the above

33. Which one of the following is an advantage of international investing?
a. you can invest in industries that don't exist in the United States
b. you can invest in companies that have lower price earnings ratios
c. you can invest in companies that are, on average, more profitable than similar U.S. firms
d. you can invest in companies with lower market book value ratios

34. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:
A) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
D) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

35. Consider two countries that trade with each other, called X and Y. Inflation in Country X will have a greater impact on inflation in Country Y under the _______ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the _______ system.
A) floating rate; fixed rate
B) floating rate; floating rate
C) fixed rate; fixed rate
D) fixed rate; floating rate

36. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:
A) pegged system.
B) fixed system.
C) managed float system.
D) crawling peg system.

37. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:
A) exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
B) exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
C) exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
D) exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

38. Due to _______, market forces should realign the relation¬ship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage

39. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A) U.S. investors could possibly benefit from covered interest arbitrage.
B) British investors could possibly benefit from covered interest arbitrage.
C) neither U.S. nor British investors could benefit from covered interest arbitrage.
D) A and B

40. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
A) larger will be the forward discount of the foreign currency.
B) larger will be the forward premium of the foreign currency.
C) smaller will be the forward premium of the foreign currency.
D) smaller will be the forward discount of the foreign currency.

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