Finance of International Trade Practice Exam
Course Introduction
Finance of International Trade explores the financial instruments, institutions, and strategies involved in the movement of goods and services across international borders. The course provides an in-depth understanding of trade finance mechanisms such as letters of credit, export credit insurance, and trade-related financing techniques.
Students examine the roles of banks, export credit agencies, and global financial organizations in facilitating trade, as well as risk management practices related to currency fluctuations, credit risk, and political risk. Emphasis is placed on the regulatory framework governing international financial transactions and the impact of global economic trends on trade finance. Through case studies and practical applications, the course prepares students to effectively manage and finance international trade activities.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations.
A) depreciates; appreciates
B) appreciates; appreciates
C) appreciates; depreciates
D) depreciates; depreciates
Answer: A
Q2) If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.
A)True
B)False
Answer: False
Q3) International trade is the most common form of direct foreign investment (DFI). A)True
B)False
Answer: False
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.
A)True
B)False
Answer: True
Q2) Which of the following statements is not true?
A) Exporters commonly complain that they are being mistreated because the currency of their country is too weak.
B) Outsourcing affects the balance of trade because it means that a service is purchased in another country.
C) Sometimes, trade policies are used to punish countries for various actions.
D) Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.
E) All of the above are true.
Answer: A
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Chapter 3: International Financial Markets
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Sample Questions
Q1) Which of the following is true?
A) Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
B) U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
C) U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.
D) A and B
Answer: C
Q2) In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States.
A)True
B)False
Answer: False
Q3) Eurobonds are certificates representing bundles of stock.
A)True
B)False Answer: False
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5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.
A)True
B)False
Q2) Liquidity of a currency can affect the extent to which speculation can impact the currency's value.
A)True
B)False
Q3) Which of the following is not mentioned in the text as a factor affecting exchange rates?
A) Relative interest rates
B) Relative inflation rates
C) Government controls
D) Expectations
E) All of the above are mentioned in the text as factors affecting exchange rates.
Q4) Government controls can only affect the supply of a given currency for sale and not the demand.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:
A) in the money.
B) out of the money.
C) at the money.
D) at a discount.
Q2) Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency.
A)True
B)False
Q3) The purchase of a currency put option would be appropriate for which of the following?
A) Investors who expect to buy a foreign bond in one month.
B) Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C) Corporations who expect to collect on a foreign account receivable in one month.
D) all of the above
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7
Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.
A) more; more
B) more; less
C) less; less
D) less; more
Q2) The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.
A) 2.25
B) 6
C) 10
D) 8
Q3) China's yuan is presently:
A) allowed to fluctuate freely without any central bank intervention.
B) allowed to fluctuate but with central bank intervention.
C) pegged to the dollar.
D) pegged to the euro.
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?
A) $2,041,667.
B) $9,804.
C) $500.
D) $1,639.
Q2) The foreign exchange market is an over-the-counter market. A)True
B)False
Q3) Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate. A) downward; downward B) downward; upward C) upward; downward D) upward; upward
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer.
A)True
B)False
Q2) If the IFE theory holds, that means that covered interest arbitrage is not feasible. A)True
B)False
Q3) Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
A) reduce the probability that PPP shall hold.
B) increase the probability that PPP shall hold.
C) increase the probability the IFE will hold.
D) B and C
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.
A)True
B)False
Q2) Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.
A) higher; to hedge
B) lower; not to hedge
C) higher; not to hedge
D) none of the above
Q3) Forecast errors tend to be large for short forecast horizons.
A)True
B)False
Q4) Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is ____ if the two currencies are ____ correlated.
A) high; positively
B) low; negatively
C) high; negatively
D) none of the above
Q2) Transaction exposure reflects:
A) the exposure of a firm's international contractual transactions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transactions between foreign exchange traders.
C) the exposure of a firm's financial statements to exchange rate fluctuations.
D) the exposure of a firm's cash flows to exchange rate fluctuations.
Q3) The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) To hedge a payable position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the U.S. until the payable is due.
A)True
B)False
Q2) Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)?
A) $224,135.
B) $226,269.
C) $224,114.
D) $223,212.
Q3) If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
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) Managing economic exposure is generally perceived to be ____ managing transaction exposure.
A) more difficult than
B) less difficult than C) just as difficult as
D) none of the above
Q2) If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:
A) cash inflows exceed cash outflows in each foreign currency.
B) cash outflows exceed cash inflows in each foreign currency.
C) cash inflows match cash outflows in each foreign currency.
D) none of the above
Q3) Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
A)True
B)False
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Page 14
Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.
A) Paraguay
B) Morocco
C) Sweden
D) China
Q2) 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) Higher; large
Q3) 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.
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) When evaluating international project cash flows, which of the following factors is relevant?
A) future inflation.
B) blocked funds.
C) exchange rates.
D) all of the above
Q2) An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Q3) The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.
A)True
B)False
Q4) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
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Chapter 15: International Corporate Governance and Control
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Q1) Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary?
A) the required rate of return on the subsidiary.
B) forecasted exchange rates of the subsidiary's currency relative to the dollar.
C) the initial outlay on the project.
D) the possible selling price of the project.
Q2) The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly after a bid by the acquiring firm.
A)True
B)False
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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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC's product.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
Q2) 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.
Q3) Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.
A)True
B)False
Q4) Country risk can affect an MNC's cash flows but cannot affect its cost of capital.
A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
A) Private placements
B) Domestic equity offerings
C) Global equity offerings
D) Global debt offerings
Q2) If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.
A)True
B)False
Q3) The term "global capital structure" is used in the text to represent the:
A) average capital structure of all MNCs across countries.
B) average capital structure of all domestic firms across countries.
C) capital structure of a subsidiary of a particular MNC.
D) capital structure of a particular MNC overall (including all subsidiaries).
Q4) The MNC's cost of equity is unrelated to the local risk-free rate.
A)True
B)False
Page 19
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Chapter 18: Long-Term Debt Financing
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Q1) If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
A) a foreign currency; weakens
B) dollars; strengthens
C) a foreign currency; strengthens
D) dollars; weakens
Q2) A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
A) stock; one currency
B) stock; a portfolio of foreign currencies
C) one currency; stock options
D) one currency; another currency
Q3) In a(n) ____ swap, the notional value is increased over time.
A) amortizing
B) basis
C) zero-coupon
D) accretion
Q4) Many MNCs simultaneously swap interest payments and currencies.
A)True
B)False
Page 20
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Chapter 19: Financing International Trade
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Sample Questions
Q1) Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
A)True
B)False
Q2) The ____ was established in 1934 with the intention to facilitate Soviet-American trade.
A) Domestic International Sales Corporation (DISC)
B) Private Export Funding Corporation (PEFCO)
C) Export-Import Bank
D) Foreign Credit Insurance Association (FCIA)
Q3) A banker's acceptance is a draft drawn on and accepted by a(n) ____.
A) bank
B) importer
C) exporter
D) none of the above
Q4) When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
A)True
B)False
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.
A)True
B)False
Q2) MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.
A) payables; euros
B) receivables; euros
C) payables; dollars
D) receivables; dollars
Q3) If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. A) lower than B) greater than C) similar to D) none of the above
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Chapter 21: International Cash Management
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Sample Questions
Q1) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True
B)False
Q2) Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?
A) 2.50%.
B) 2.60%.
C) 2.40%.
D) none of the above
Q3) Netting can achieve all but one of the following:
A) Cross border transactions between subsidiaries are reduced.
B) Transactions costs are reduced.
C) Currency conversion costs are reduced.
D) Transaction exposure is eliminated.
Q4) A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic.
A)True
B)False
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