Emerging Markets Finance
Exam Practice Tests
Course Introduction
Emerging Markets Finance explores the unique challenges and opportunities present in the financial systems of developing economies. The course examines topics such as capital market development, risk management, cross-border investment, currency volatility, and the impact of political and economic reforms on financial markets. Students will analyze case studies from various regions, assess the role of multinational institutions, and evaluate the strategies used by corporations and investors to succeed in emerging market environments. Emphasis is placed on understanding market structure, regulatory frameworks, and financial instruments within rapidly evolving economies.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.
A)True
B)False
Answer: True
Q2) Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co?
A) $200,000
B) $559,500
C) $582,500
D) $393,500
Answer: B
Q3) The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.
A)True
B)False
Answer: True
Page 3
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) "Dumping" is used in the text to represent the:
A) exporting of goods that do not meet quality standards.
B) sales of junk bonds to foreign countries.
C) removal of foreign subsidiaries by the host government.
D) exporting of goods at prices below cost.
Answer: D
Q2) If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments).
A) decrease
B) increase
C) remain unaffected
D) either A or C are possible
Answer: B
Q3) The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries. A)True
B)False
Answer: False
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Chapter 3: International Financial Markets
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Sample Questions
Q1) The bid-ask spread on an exchange rate can be used to directly determine:
A) how an exchange rate will change.
B) the transaction cost of foreign exchange.
C) the forward premium.
D) the currency option premium.
Answer: B
Q2) Certificates representing bundles of stock of non-U.S. firms are called:
A) Eurobonds
B) ADRs
C) FRNs
D) Eurobor
Answer: B
Q3) Shareholders can have influence on a wider variety of management issues in some countries.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.
A) fewer; depreciate
B) fewer; appreciate
C) more; depreciate
D) more; appreciate
Q2) If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
A) liquid; highly sensitive
B) illiquid; insensitive
C) illiquid; highly sensitive
D) none of the above.
Q3) Increases in relative income in one country vs. another result in an increase in the first country's currency value.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.
A)True
B)False
Q2) The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
A)True
B)False
Q3) A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:
A) buying an identical futures contract.
B) selling an identical futures contract.
C) buying a futures contract with a different settlement date.
D) selling a futures contract for a different amount of currency.
E) purchasing a put option contract in the same currency.
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Which of the following are examples of currency controls?
A) import restrictions.
B) prohibition of remittance of funds.
C) ceilings on granting credit to foreign firms.
D) all of the above
Q2) A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.
A)True
B)False
Q3) The euro is the currency:
A) adopted in all western European countries as of 1999.
B) adopted in all eastern European countries as of 1999.
C) adopted in all European countries as of 1999.
D) none of the above
Q4) A strong dollar is normally expected to cause:
A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.
A)True
B)False
Q2) Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?
A) 7.96%; feasible
B) 6.04%; feasible
C) 6.04%; not feasible
D) 4.07%; not feasible
E) 10.00%; feasible
Q3) Due to ____, market forces should realign the spot rate of a currency among banks.
A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage
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9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.
A)True
B)False
Q2) Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.
A) appreciate; 4.85
B) depreciate; 3,11
C) appreciate; 3.11
D) depreciate; 4.85
Q3) If the IFE theory holds, that means that covered interest arbitrage is not feasible. A)True
B)False
Q4) Interest rate parity can only hold if purchasing power parity holds.
A)True
B)False
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.
A) 1.02
B) 1.03
C) 1.04
D) none of the above
Q2) Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
A) appreciation of pound's value over the next year.
B) depreciation of pound's value over the next year.
C) no change in pound's value over the next year.
D) not enough information to answer this question.
Q3) Foreign exchange markets are generally found to be at least ____ efficient.
A) weak-form
B) semistrong-form
C) strong form
D) none of the above
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Currency correlations are generally negative.
A)True
B)False
Q2) One argument for exchange rate irrelevance is that:
A) MNCs can hedge exchange rate exposure much more effectively than individual investors.
B) investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
C) purchasing power parity does not hold very well.
D) MNCs are typically not diversified across numerous countries.
Q3) A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.
A)True
B)False
Q4) The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.
A) have the same result as a call option hedge on payables
B) have the same result as a put option hedge on payables
C) have the same result as a money market hedge on payables
D) require more dollars than a money market hedge
E) A and D
Q2) Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A) sell euros forward.
B) purchase euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged.
Q3) A put option essentially represents two swaps of currencies, one swap at the inception of the loan contract and another swap at a specified date in the future.
A)True
B)False
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.
A) benefit; appreciation
B) benefit; depreciation
C) not benefit; appreciation
D) none of the above
Q2) Translation exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
A)True
B)False
Q3) ____ is (are) not a limitation of hedging translation exposure.
A) Inaccurate stock price forecasts
B) Inadequate forward contracts for some currencies
C) Taxation on gains from forward contracts
D) Increased transaction exposure
Q4) All MNCs are subject to transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) Which of the following is not a cost-related motive of direct foreign investment?
A) International diversification.
B) Low labor costs.
C) Land can be purchased at a low price.
D) Manufacturing plants can be built for a low price.
Q2) ____ is not a disadvantage of direct foreign investment.
A) The expense of establishing a foreign subsidiary
B) The uncertainty of inflation and exchange rate movements
C) Political risk
D) All of the above are disadvantages of direct foreign investment
Q3) ____ is not a cost-related motive for direct foreign investment (DFI).
A) Using foreign factors of production
B) Using foreign raw materials
C) Using foreign technology
D) Reacting to trade restrictions
E) Fully benefiting from economies of scale
Q4) Developing countries are mostly targeted because they have advanced technology.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%?
A) -$17,602.62.
B) $8,000,000.
C) $1,048,829.
D) $645,147.
Q2) A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2 through 5.
A) depreciates; depreciates
B) appreciates; appreciates
C) depreciates; appreciates
D) appreciates; depreciates
Q3) In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.
A)True
B)False
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
A)True
B)False
Q2) Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?
A) Differences in estimated cash flows to be generated by the foreign target
B) Differences in estimated exchange rates
C) Differences in required rates of return
D) All of the above are possible reasons why the valuation of a foreign target may vary among MNCs
Q3) An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place.
A)True
B)False
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Page 17
Chapter 16: Country Risk Analysis
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Sample Questions
Q1) To make an MNC's operations coincide with its own goal, a host government could do all of the following, except:
A) require the use of local employees for managerial positions.
B) require social facilities.
C) subsidize the MNC.
D) require environmental controls.
Q2) According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to:
A) compare each form of a country risk rating to a benchmark level.
B) estimate the effect of each form of country risk on cash flows.
C) estimate the effect of each form of country risk on the income statement and balance sheet.
D) adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs.
Q3) Which of the following is not a form of financial risk?
A) Exchange rate movements
B) Inflation rates
C) Blockage of fund transfers
D) All of the above are forms of financial risk.
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Page 18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
A) debt
B) retained earnings
C) short-term loans
D) none of the above
Q2) Which of the following is not a reason provided in the text regarding why the cost of debt can vary across countries?
A) differences in the risk-free rate.
B) a high price-earnings multiple.
C) differences in the credit risk premium.
D) differences in demographics.
Q3) Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC's cost of capital.
A)True
B)False
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
A)True
B)False
Q2) The yields offered on newly issued bonds tend to be:
A) lower in less developed countries where labor costs are low.
B) relatively high in countries such as Japan and the U.S. because the credit risk premium is much higher there than in other countries.
C) the same across countries at a give point in time.
D) none of the above
Q3) An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for short-term debt than for long-term debt. The yield curve in this country reflects ____.
A) higher; several periods
B) lower; several periods
C) higher; a specific point in time
D) lower; a specific point in time
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Chapter 19: Financing International Trade
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Sample Questions
Q1) An irrevocable L/C obligates the issuing bank to honor all drawings presented in conformity with the terms of the L/C.
A)True
B)False
Q2) The term counterpurchase denotes the exchange of goods between two parties under two distinct contracts expressed in monetary terms.
A)True
B)False
Q3) Consider a bank that acknowledges that it will make payments on behalf of a computer importer after the computers are delivered to the importer. This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
Q4) A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped.
A)True
B)False
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21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.
A) high; low
B) high; high
C) low; low
D) low; high
Q2) The interest rate of euronotes is based on the T-bill rate.
A)True
B)False
Q3) Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?
A)37.8%.
B)51.43%.
C)-25.8%.
D)-6%.
E)none of the above
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Page 22
Chapter 21: International Cash Management
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Sample Questions
Q1) Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?
A) 11.08%
B) 8.93%
C) 10.00%
D) None of the above
Q2) Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.
A)True
B)False
Q3) An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.
A)True
B)False
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