Foreign Exchange Markets and Management
Exam Solutions
Course Introduction
This course provides a comprehensive overview of the foreign exchange (FX) markets and their management, focusing on the mechanisms, instruments, and participants that drive global currency trading. Students will explore key concepts such as exchange rate determination, FX market structure, and currency derivative products, including forwards, futures, and options. The course addresses practical aspects of risk exposure, hedging strategies, and regulatory considerations, equipping students with the analytical tools to understand and manage the risks and opportunities arising from currency fluctuations in international financial management.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
Available Study Resources on Quizplus
21 Chapters
1676 Verified Questions
1676 Flashcards
Source URL: https://quizplus.com/study-set/460
Page 2
Chapter 1: Multinational Financial Management: An Overview
Available Study Resources on Quizplus for this Chatper
79 Verified Questions
79 Flashcards
Source URL: https://quizplus.com/quiz/8247
Sample Questions
Q1) If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).
A)True
B)False
Answer: False
Q2) Which of the following is not mentioned in the text as a theory of international business?
A) Theory of Comparative Advantage
B) Imperfect Markets Theory
C) Product Cycle Theory
D) Globalization of Business Theory
E) All of the above are mentioned in the text as theories of international business
Answer: D
Q3) A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: International Flow of Funds
Available Study Resources on Quizplus for this Chatper
75 Verified Questions
75 Flashcards
Source URL: https://quizplus.com/quiz/8248
Sample Questions
Q1) The primary component of the current account is the:
A) balance of trade.
B) balance of money market flows.
C) balance of capital market flows.
D) unilateral transfers.
Answer: A
Q2) Over the last several years, international trade has generally:
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.
Answer: A
Q3) A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: International Financial Markets
Available Study Resources on Quizplus for this Chatper
102 Verified Questions
102 Flashcards
Source URL: https://quizplus.com/quiz/8249
Sample Questions
Q1) 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
Q2) An obligation to purchase a specific amount of currency at a future point in time is called a:
A) call option
B) spot contract
C) put option
D) forward contract
E) both B and D
Answer: D
Q3) The main participants in the international money market are:
A) consumers.
B) small firms.
C) large corporations.
D) small European firms needing European currencies for international trade.
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Exchange Rate Determination
Available Study Resources on Quizplus for this Chatper
74 Verified Questions
74 Flashcards
Source URL: https://quizplus.com/quiz/8250
Sample Questions
Q1) 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
Q2) Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.
A) increase; U.S. dollar
B) increase; nondollar currencies
C) decrease; nondollar currencies
D) decrease; U.S. dollar
Q3) Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
6
Chapter 5: Currency Derivatives
Available Study Resources on Quizplus for this Chatper
163 Verified Questions
163 Flashcards
Source URL: https://quizplus.com/quiz/8251
Sample Questions
Q1) Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
A)True
B)False
Q2) If you have a position where you might be obligated to sell pounds, you are:
A) a call writer.
B) a call buyer.
C) a put writer.
D) a put buyer.
Q3) Which of the following are most commonly traded on an exchange?
A) forward contracts.
B) futures contracts.
C) currencies
D) none of the above
Q4) The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?
A) $1.52
B) $1.61
C) $1.37
D) $1.46
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Government Influence on Exchange Rates
Available Study Resources on Quizplus for this Chatper
117 Verified Questions
117 Flashcards
Source URL: https://quizplus.com/quiz/8252
Sample Questions
Q1) China is commonly criticized for keeping the yuan's value at superficially high levels.
A)True
B)False
Q2) Market forces are the determinant of exchange rates in a freely floating exchange rate system.
A)True
B)False
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) If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: International Arbitrage and Interest Rate Parity
Available Study Resources on Quizplus for this Chatper
97 Verified Questions
97 Flashcards
Source URL: https://quizplus.com/quiz/8253
Sample Questions
Q1) Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?
A) upward pressure on the Swiss franc's spot rate.
B) upward pressure on the U.S. interest rate.
C) downward pressure on the Swiss interest rate.
D) upward pressure on the Swiss franc's forward rate.
Q2) Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?
A) $318,109.10.
B) $330,000.00.
C) $312,218.20.
D) $323,888.90.
E) none of the above
Q3) If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/8254
Sample Questions
Q1) Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
A) reduce the probability that PPP shall hold.
B) increase the probability that PPP shall hold.
C) increase the probability the IFE will hold.
D) B and C
Q2) If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
A) some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
B) some corporations with excess cash could have generated profits on average from covered interest arbitrage.
C) some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
D) most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Forecasting Exchange Rates
Available Study Resources on Quizplus for this Chatper
96 Verified Questions
96 Flashcards
Source URL: https://quizplus.com/quiz/8255
Sample Questions
Q1) Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below are the forecasted and realized values for the last period:
\(\begin{array}{llcc}
\underline{ \text { Currency }} & \underline{ \text { Forecasted Value}}&\underline{ \text {Realized Value}} \\
\text { Australian dollar } &\$.60&\$.55\\ \text {Japanese yen } &\$.0067&\$.0069\\ \end{array}\)
According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.
A) more accurate than B) less accurate than C) more biased than D) the same as
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
Available Study Resources on Quizplus for this Chatper
94 Verified Questions
94 Flashcards
Source URL: https://quizplus.com/quiz/8256
Sample Questions
Q1) ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
A) Transaction
B) Economic
C) Translation
D) None of the above
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) Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
A) economic exposure.
B) transaction exposure.
C) translation exposure.
D) economic and transaction exposure.
Page 12
To view all questions and flashcards with answers, click on the resource link above.
Chapter 11: Managing Transaction Exposure
Available Study Resources on Quizplus for this Chatper
92 Verified Questions
92 Flashcards
Source URL: https://quizplus.com/quiz/8257
Sample Questions
Q1) The price at which a currency put option allows the holder to sell a currency is called the settlement price.
A)True
B)False
Q2) Celine Co. will need 500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09. Based on this information, the expected value of the real cost of hedging payables is $____.
A) -35,000
B) 25,000
C) -1,000
D) 1,000
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
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/8258
Sample Questions
Q1) 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.
Q2) Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.
A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease
E) increase; be unaffected
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Direct Foreign Investment
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/8259
Sample Questions
Q1) Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns.
A) decrease
B) increase
C) decrease or increase, depending on the exact size of the returns and standard deviations
D) none of the above
Q2) Direct foreign investment is commonly considered by MNCs because it allows the MNC to:
A) attract new sources of demand.
B) enter profitable markets.
C) react to exchange rate movements.
D) react to trade restrictions.
E) all of the above
To view all questions and flashcards with answers, click on the resource link above.
Page 15
Chapter 14: Multinational Capital Budgeting
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/8260
Sample Questions
Q1) ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
A) Discriminant analysis
B) Risk-adjusted discount rate
C) Sensitivity analysis
D) Simulation
Q2) One foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.
A) negative
B) higher than that for the Hungarian project
C) lower than that for the Hungarian project
D) the same as that for the Hungarian project
E) A and C
Q3) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: International Corporate Governance and Control
Available Study Resources on Quizplus for this Chatper
74 Verified Questions
74 Flashcards
Source URL: https://quizplus.com/quiz/8261
Sample Questions
Q1) A simple method of valuing a private company is to apply the price-earnings ratios of publicly traded firms in the same industry to the private company's earnings.
A)True
B)False
Q2) Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested.
A)True
B)False
Q3) 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.
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Country Risk Analysis
Available Study Resources on Quizplus for this Chatper
57 Verified Questions
57 Flashcards
Source URL: https://quizplus.com/quiz/8262
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) Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.
A)True
B)False
Q3) ____ is not a political risk factor.
A) High interest rates in a foreign country
B) Currency inconvertibility
C) War
D) Corruption
Q4) 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.
Page 18
To view all questions and flashcards with answers, click on the resource link above.
Chapter 17: Multinational Cost of Capital and Capital Structure
Available Study Resources on Quizplus for this Chatper
71 Verified Questions
71 Flashcards
Source URL: https://quizplus.com/quiz/8263
Sample Questions
Q1) 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).
Q2) In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.
A)True
B)False
Q3) Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.
A) higher; higher
B) lower; higher
C) higher; lower
D) B and C
E) none of the above
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Long-Term Debt Financing
Available Study Resources on Quizplus for this Chatper
54 Verified Questions
54 Flashcards
Source URL: https://quizplus.com/quiz/8264
Sample Questions
Q1) 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
Q2) An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bonds have a coupon rate of 15%. If the peso remains stable at its current level of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be:
A) 10.0%.
B) 12.5%.
C) 15.0%.
D) none of the above
Q3) In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
A) callable
B) putable
C) amortizing
D) zero-coupon
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Financing International Trade
Available Study Resources on Quizplus for this Chatper
73 Verified Questions
73 Flashcards
Source URL: https://quizplus.com/quiz/8265
Sample Questions
Q1) According to the text, international trade activity has generally ____ over time. This should cause the popularity of trade finance techniques to ____ over time.
A) increased; increase
B) increased; decrease
C) decreased; increase
D) decreased; decrease
Q2) ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
A) A standby L/C
B) A transferable L/C
C) Assignment of proceeds
D) None of the above
Q3) Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:
A) accounts receivable financing.
B) consignment.
C) factoring.
D) a letter of credit.
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: Short-Term Financing
Available Study Resources on Quizplus for this Chatper
55 Verified Questions
55 Flashcards
Source URL: https://quizplus.com/quiz/8266
Sample Questions
Q1) 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%.
Q2) Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and $____ are needed to repay the loan.
A)375,000; 449,400
B)449,400; 375,000
C)6,000,000; 5,357,143
D)5,357,143; 6,000,000
Q3) The interest rate of euronotes is based on the T-bill rate.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: International Cash Management
Available Study Resources on Quizplus for this Chatper
51 Verified Questions
51 Flashcards
Source URL: https://quizplus.com/quiz/8267
Sample Questions
Q1) 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
Q2) Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by Moore Corporation?
A) .624%.
B) 7.950%.
C) 1.040%.
D) 10.200%.
E) none of the above
Q3) According to ____, the effective yield earned by U.S. investors will be the same as the effective yield earned by non-U.S. investors in any given period.
A) interest rate parity (IRP)
B) the international Fisher effect (IFE)
C) purchasing power parity (PPP)
D) none of the above
To view all questions and flashcards with answers, click on the resource link above.
23