Cross-border Investment Analysis
Pre-Test Questions
Course Introduction
Cross-border Investment Analysis explores the principles, tools, and strategies involved in evaluating and managing investments across national boundaries. The course examines foreign direct investment, portfolio diversification, risk assessment, regulatory considerations, and the impact of international economic, political, and cultural environments on investment decisions. Students will analyze capital flows, exchange rate risks, tax implications, and legal frameworks to develop comprehensive investment strategies in a global context. The course combines theoretical frameworks with real-world case studies to provide practical insights into identifying and capitalizing on international investment opportunities.
Recommended Textbook
Multinational Business Finance 15th Edition by
David K. Eiteman
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18 Chapters
1227 Verified Questions
1227 Flashcards
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Page 2
Chapter 1: Multinational Financial Management: Opportunities and Challenges
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73 Verified Questions
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Sample Questions
Q1) Typically, a "greenfield" investment abroad is considered an investment having a greater foreign presence than a joint venture with a foreign firm.
A)True
B)False
Answer: True
Q2) 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
Answer: C
Q3) It would be safe to make the statement that modern telecommunications now take business activities to labor rather than moving labor to the places of business.
A)True
B)False
Answer: True
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Chapter 2: The International Monetary System
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Sample Questions
Q1) Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).
A)True
B)False
Answer: True
Q2) The People's Republic of China has two official currencies, the Chinese renminbi (RMB) and the yuan (CNY).
A)True
B)False
Answer: False
Q3) The IMF's methodology for classifying exchange rate regimes today is based on the official policy statement of the respective governments, de jure classification.
A)True
B)False
Answer: False
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Chapter 3: The Balance of Payments
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Sample Questions
Q1) For at least the last decade, the United States has consistently run a surplus in services trade income.
A)True
B)False
Answer: True
Q2) Imports have the potential to lower a country's inflation rate. In particular, imports of HIGHER-priced goods and services place a limit on what domestic competitors charge for comparable goods and services.
A)True
B)False Answer: False
Q3) The transition to floating exchange rate regimes in the 1970s (described in Chapter .3) changed the focus from the total BOP to its various subaccount like the current and financial account balances.
A)True
B)False Answer: True
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Page 5
Chapter 4: Financial Goals and Corporate Governance
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Sample Questions
Q1) 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.
Q2) 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.
Q3) In the stakeholder capitalism model (SCM) the assumption of market efficiency is absolutely critical.
A)True
B)False
Q4) State Owned Enterprises (SOEs) by their very name cannot be traded on stock exchanges because they are government owned.
A)True
B)False
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and "selling dollars forward for euros."
A)True
B)False
Q2) 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; arbitrageurs
Q3) ________ 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 arbitrageurs
B) Foreign exchange brokers
C) Central banks
D) Treasuries
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Page 7
Chapter 6: International Parity Conditions
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Sample Questions
Q1) 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) overcompensating
C) undervalued
D) undercompensating
Q2) ________ 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
Q3) The Big Mac is considered a good candidate for the application of the law of one price and measurement of under- or overvaluation of a currency. Develop an argument as to why this is a good idea.
Q4) Explain the logic behind the application of the PPP theory to explain changes in the spot exchange rate.
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Chapter 7: Foreign Currency Derivatives: Futures and Options
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Sample Questions
Q1) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.
A)True
B)False
Q2) 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.
Q3) The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.
A)True
B)False
Q4) 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.
Page 9
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Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:
A) cost of capital.
B) access to capital.
C) credit risk premium.
D) risk-free rate.
Q2) 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.
A)True
B)False
Q3) 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.
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Chapter 9: Foreign Exchange Rate Determination and Intervention
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Sample Questions
Q1) The Asian Currency crisis appeared to begin in:
A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.
Q2) The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks.
A)True
B)False
Q3) Which of the following is NOT a motivation for a government or central bank to manipulate domestic currency valuation?
A) fight inflation
B) slow too rapid economic growth
C) spur too slow economic growth
D) All of the above are motivations for the government or central bank to manipulate currency values.
Q4) Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?
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Chapter 10: Transaction Exposure
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Sample Questions
Q1) With a perfect hedge, there is no uncovered exposure remaining.
A)True
B)False
Q2) Refer to Instruction 10.1. What is the cost of a call option hedge for CVT'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) $57,600
B) $59,904
C) $62,208
D) $63,936
Q3) ________ exposure deals with cash flows that result from existing contractual obligations.
A) Operating
B) Transaction
C) Translation
D) Economic
Q4) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False
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Chapter 11: Translation Exposure
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Sample Questions
Q1) It is possible to use different exchange rates for different line items on a financial statement.
A)True
B)False
Q2) ________ 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
Q3) 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
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Page 13
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Chapter 12: Operating Exposure
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Sample Questions
Q1) Recently the Canadian dollar realized an unexpected appreciation in value. Which of the following actions being considered by Tall Timber Exports, a Canadian logging firm specializing in exporting raw forest products, would be considered a highly unlikely response to the appreciation of the Canadian dollar?
A) Tall Timber Exports might lower export prices in an effort to maintain market share.
B) Tall Timber Exports might raise export prices only slightly in an effort to increase market share.
C) Tall Timber Exports might leave export prices as they are and wait to determine what actions to take if any in the future.
D) all of the above
Q2) The empirical evidence strongly supports the proposition that contractual hedges can effectively eliminate operating exposure.
A)True
B)False
Q3) Currency swaps are exclusively for periods of time under one year.
A)True
B)False
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Page 14
Chapter 13: Global Cost and Availability of Capital
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Sample Questions
Q1) Portfolio diversification can eliminate 100% of risk.
A)True
B)False
Q2) 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.
Q3) 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?
Q4) 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.
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Chapter 14: Funding the Multinational Firm
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Sample Questions
Q1) Once a firm has "gone public," it is open to a considerably higher level of public scrutiny.
A)True
B)False
Q2) 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.
Q3) A distinction about the publicly traded firm's shares is that they raise capital with the daily rise and fall of their share prices.
A)True
B)False
Q4) A euroequity issue is an initial public offering of euro denominated securities.
A)True
B)False
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Page 16
Chapter 15: Multinational Tax Management
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Sample Questions
Q1) 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
C) to improve the U.S. balance of payments
D) All of the above are objectives.
Q2) Of the following, which is NOT cited by the authors as an example of tax haven?
A) Ireland
B) Bermuda
C) Cayman Islands
D) Bahamas
Q3) 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
Q4) 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?
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Chapter 16: International Trade Finance
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Sample Questions
Q1) The risk of noncompletion is most important:
A) when the international trade is recurrent in nature.
B) when there is a sustained relationship between the buyer and seller.
C) with an outstanding agreement for recurring shipments.
D) when the relationship is between countries whose currencies are considered strong.
Q2) The Export-Import Bank (also called Eximbank) is an independent agency of the U.S. government, established in 1934 to stimulate and facilitate the foreign trade of the United States.
A)True
B)False
Q3) 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
Q4) The primary advantage of a letter of credit is that it reduces risk.
A)True
B)False
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Chapter 17: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) Which of the following is NOT a market imperfection or genuine comparative advantage that attracts FDI to particular locations?
A) low cost and productive labor force
B) unique sources of raw materials
C) defensive investments
D) an expansive monetary policy
Q2) MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.
A)True
B)False
Q3) 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
Q4) The decision about where to invest abroad is influenced by behavioral factors. Explain the behavioral approach to FDI.
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Sample Questions
Q1) As opposed to greenfield investment, a cross-border acquisition is typically quicker. A)True
B)False
Q2) 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.
Q3) ________ 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
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Page 20