Financial Risk Management
Final Test Solutions
Course Introduction
Financial Risk Management introduces students to the concepts, tools, and techniques used to identify, assess, and mitigate various financial risks faced by organizations and individuals in today's global markets. The course covers key topics such as market risk, credit risk, liquidity risk, and operational risk, emphasizing quantitative and qualitative approaches to measuring potential losses and implementing effective risk control strategies. Students gain practical experience with risk management instruments, including derivatives and insurance products, and examine regulatory frameworks and best practices in risk governance. By the end of the course, learners will be equipped to analyze risk exposures and develop comprehensive strategies for managing financial uncertainty.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
1676 Verified Questions
1676 Flashcards
Source URL: https://quizplus.com/study-set/460
Page 2
Chapter 1: Multinational Financial Management: An Overview
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size.
A)True
B)False
Answer: True
Q2) The goal of a multinational corporation (MNC) is
A) The minimization of taxes remitted from foreign subsidiaries.
B) The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
C) The maximization of shareholder wealth.
D) The maximization of social benefits resulting from actions such as the employment of foreign managers.
Answer: C
Q3) A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC.
A)True
B)False
Answer: False
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.
A)True
B)False
Answer: False
Q2) The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.
A)True
B)False Answer: True
Q3) The capital account reflects changes in country ownership of long-term (but not short-term) assets.
A)True
B)False Answer: False
Q4) A balance of trade surplus indicates an excess of imports over exports.
A)True
B)False
Answer: False
Page 4
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Chapter 3: International Financial Markets
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) ____ 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
Answer: D
Q2) In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy.
A)True
B)False
Answer: True
Q3) Eurobonds:
A) can be issued only by European firms.
B) can be sold only to European investors.
C) A and B
D) none of the above
Answer: D
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.
A) appreciate
B) depreciate
C) remain unchanged
D) cannot be determined from the information provided.
Q2) Which of the following events would most likely result in an appreciation of the U.S. dollar?
A) U.S. inflation is very high.
B) The Fed indicates that it will raise U.S. interest rates.
C) Future U.S. interest rates are expected to decline.
D) Japan is expected to increase interest rates in the near future.
Q3) If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) An advantage of a short straddle is that it provides the option writer with income from two separate sources.
A)True
B)False
Q2) Which of the following is true?
A) The futures market is primarily used by speculators while the forward market is primarily used for hedging.
B) The futures market is primarily used for hedging while the forward market is primarily used for speculating.
C) The futures market and the forward market are primarily used for speculating. D) The futures market and the forward market are primarily used for hedging.
Q3) If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.
A)True
B)False
Q4) Due to put-call parity, we can use the same formula to price calls and puts.
A)True
B)False
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7
Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.
A)True
B)False
Q2) 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
Q3) A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.
A) upward; upward
B) downward; upward
C) upward; downward
D) downward; downward
Q4) The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.
A) discount; 2.73
B) premium; 2.73
C) discount; 3.65
D) premium; 3.65
Q2) The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.
A)True
B)False
Q3) The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.
A)True
B)False
Q4) The yield curve of every country has its own unique shape.
A)True
B)False
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9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Because there are sometimes no substitutes for traded goods, 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
Q2) If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____ by about ____%, according to the international Fisher effect (IFE).
A) depreciate; 2.9
B) appreciate; 2.9
C) depreciate; 1.0
D) appreciate; 1.0
E) none of the above
Q3) 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
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____%.
A) 1.90
B) 2.00
C) -1.87
D) none of the above
Q2) If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.
A) higher; buy; upward
B) higher; sell; downward
C) higher; sell; upward
D) lower; buy; upward
Q3) Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.
A) technical
B) fundamental
C) market-based
D) none of the above
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Page 11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
A)True
B)False
Q2) Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.
A) strong dollar; favorably
B) weak dollar; not
C) strong dollar; not
D) weak dollar; favorably
Q3) 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
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium.
A)True
B)False
Q2) If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
A) put option
B) forward
C) call option
D) none of the above
Q3) To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.
A)True
B)False
Q4) A futures hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution.
A) short-term
B) long-term
C) immediate
D) none of the above
Q2) Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
A)True
B)False
Q3) The management of economic exposure is normally focused completely on transactions that will occur in the next three months.
A)True
B)False
Q4) A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.
A)True
B)False
Page 14
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) To diversify internationally for the purpose of reducing risk, which strategy is appropriate?
A) Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based.
B) Establish a subsidiary in a market that has relatively low cost of labor or land.
C) Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time.
D) Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.
Q2) Direct foreign investment would typically be welcomed if:
A) the products to be produced are substitutes for other locally produced products.
B) people from the country of the company's headquarter are transferred to the foreign country to work at the subsidiary.
C) the products to be produced are going to be exported.
D) all of the above
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
A) appreciates; decreases
B) depreciates; is unaffected
C) appreciates; is unaffected
D) depreciates; decreases
E) B and C
Q2) Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.
A)True
B)False
Q3) The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk. A)True
B)False
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) A previously undertaken project in a foreign country may no longer be feasible because:
A) interest rates have declined.
B) the MNC's cost of capital has decreased.
C) the host government has increased its tax rates substantially.
D) exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Q2) According to your text, all of the following are factors to be considered in an international acquisition, except
A) the target's willingness to be acquired.
B) the target's previous acquisition history.
C) the target's previous cash flows.
D) the target's local economic conditions.
Q3) 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
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) Unlike project risk, country risk cannot be incorporated into the capital budgeting analysis of a proposed project by adjustment of the discount rate or by adjustment of the estimated cash flows.
A)True
B)False
Q2) A micro-assessment of country risk:
A) is adjusted for the particular business of the firm involved. B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above
Q3) Since country risk is constantly changing and events in other parts of the world are largely unpredictable, country risk analysis is not important for MNCs.
A)True
B)False
Q4) If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant.
A)True
B)False
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Page 18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) The term "global" target capital structure for an MNC represents the MNC's capital structure:
A) in the U.S.
B) relative to competitors across all countries.
C) where it has its largest subsidiary.
D) when consolidating all of its subsidiaries.
Q2) An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis. A)True B)False
Q3) According to the text, an MNC's "global" target capital structure is:
A) always debt-intensive.
B) always equity-intensive.
C) sometimes different from an MNC's "local" capital structures (at subsidiaries).
D) none of the above
Q4) The MNC's cost of equity is unrelated to the local risk-free rate. A)True B)False
19
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) Lantana Co. conducts pays for many imports denominated in Canadian dollars. It is a major exporter to France, and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in:
A) U.S. dollars.
B) euros.
C) Canadian dollars
D) none of the above
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) Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) 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
Q2) ____ is not a type of program offered by Ex-Imbank.
A) Guarantees
B) Loans
C) Currency swap insurance
D) Bank insurance
Q3) The sale of accounts receivable to a third party for a discount is called factoring.
A)True
B)False
Q4) In an open account transaction, the exporter ships the goods to the importer but retains title to the goods until they have been sold.
A)True
B)False
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21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) 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
Q2) Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:
A)8%.
B)14.48%.
C)2%.
D)1.52%.
Q3) Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
A)True B)False
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22
Chapter 21: International Cash Management
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Sample Questions
Q1) 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
Q2) According to the international Fisher effect:
A) exchange rates adjust to compensate for income differentials between countries.
B) interest rates adjust to compensate for income differentials between countries.
C) exchange rates adjust to compensate for interest rate differentials between countries.
D) exchange rates adjust to compensate for risk differentials between countries.
Q3) Which of the following is true?
A) Some countries may prohibit netting.
B) Some countries may prohibit forms of leading and lagging.
C) A and B
D) None of the above
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