Global Financial Management Practice Questions
Course Introduction
Global Financial Management explores the complexities and challenges of managing financial operations in an international context. The course delves into key topics such as foreign exchange markets, international financial instruments, risk management strategies, global capital budgeting, and multinational financing decisions. Students will examine how global economic, political, and regulatory environments affect financial decision-making in multinational corporations. Through case studies and real-world examples, learners will develop the analytical skills necessary to evaluate cross-border investment opportunities and manage financial risks in an increasingly interconnected world.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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21 Chapters
1584 Verified Questions
1584 Flashcards
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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 commonly accepted goal of an MNC is to:
A)maximize short-term earnings.
B)maximize shareholder wealth.
C)minimize risk.
D)A and C.
E)maximize international sales.
Answer: B
Q2) MNCs commonly consider acquiring an existing foreign operation because the cost is less expensive than establishing a new subsidiary of the same size.
A)True
B)False
Answer: False
Q3) Which of the following theories identifies the nontransferability of resources as a reason for international business?
A)theory of comparative advantage
B)imperfect markets theory
C)product cycle theory
D)none of the above
Answer: B
Page 3
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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 imports over exports.
A)True
B)False
Answer: False
Q2) Direct foreign investment into the United States represents a ____.
A)capital inflow
B)trade inflow
C)capital outflow
D)trade outflow
Answer: A
Q3) The United States typically has a balance-of-trade surplus in its trade with ____.
A)China
B)Japan
C)A and B
D)none of the above
Answer: D
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Page 4
Chapter 3: International Financial Markets
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Sample Questions
Q1) The preferences of corporations and governments to borrow in foreign currencies on a short-term basis and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.
A)True
B)False
Answer: False
Q2) A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.
A)True
B)False
Answer: True
Q3) When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations will be based on the:
A)closing prices in the United States during the previous day.
B)closing prices in Canada during the previous day.
C)prevailing prices in locations where the foreign exchange markets are already open.
D)officially set by central banks before the U.S. market opens.
Answer: C
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Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value.
A)increase; downward
B)decrease; upward
C)increase; upward
D)decrease; downward
Q2) When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.
A)True
B)False
Q3) If U.S. inflation suddenly increased while European inflation stayed the same, there would be:
A)an increased U.S. demand for euros and an increased supply of euros for sale.
B)a decreased U.S. demand for euros and an increased supply of euros for sale.
C)a decreased U.S. demand for euros and a decreased supply of euros for sale.
D)an increased U.S. demand for euros and a decreased supply of euros for sale.
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Page 6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) The forward premium is the price specified in a call or put option.
A)True
B)False
Q2) If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.
A)True
B)False
Q3) Which of the following is true for futures, but not for forwards?
A)actual delivery
B)no transactions costs
C)self-regulating market
D)none of the above
Q4) If a currency put option is out of the money, then the present exchange rate is less than the strike price.
A)True
B)False
Q5) The highest amount a buyer of a call or a put option can lose is the exercise price.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Which one of the following is a disadvantage of a fixed exchange rate system:
A)Importers are insulated from the risk that the currency will appreciate over time.
B)Management of an MNC is less difficult.
C)The government might change the value of the currency.
D)Exporters are insulated from the risk that the currency will depreciate over time.
Q2) The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.
A)True
B)False
Q3) A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.
A)True
B)False
Q4) The Asian crisis is generally believed to have started in Japan.
A)True
B)False
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8
Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.
A)True
B)False
Q2) Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?
A)Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.
B)Americans who invest in the United States earn the same rate of return as Germans who attempt covered interest arbitrage.
C)Americans who invest in the United States earn the same rate of return as Germans who invest in Germany
D)A and B
E)None of the above
Q3) 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) Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
A)the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
B)the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
C)the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
D)the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
Q2) Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).
A)reduce; increase; appreciation
B)increase; reduce; appreciation.
C)reduce; increase; depreciation, D)reduce; increase; appreciation.,
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Page 10
Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.
A)True
B)False
Q2) According to the text, research generally supports ____ in foreign exchange markets.
A)weak-form efficiency
B)semistrong-form efficiency
C)strong-form efficiency
D)A and B
E)B and C
Q3) Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
A)True
B)False
Q4) Forecast errors tend to be large for short forecast horizons.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) The Canadian dollar's volatility has changed over time but is normally less than the volatility of other currencies.
A)True
B)False
Q2) Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____.
A)increase; decrease
B)decrease; remain unchanged
C)decrease; increase
D)increase; remain unchanged
Q3) In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.
A)True
B)False
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Page 12
Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?
A)$377,115
B)$373,558
C)$363,019
D)$370,000
Q2) To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.
A)money market
B)futures
C)forward
D)options
Q3) Most MNCs can completely hedge all of their transactions.
A)True
B)False
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13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A perfect hedge (full coverage) on translation exposure can usually be achieved when:
A)using a money market hedge.
B)using a forward hedge.
C)using a futures hedge.
D)none of the above, since a perfect hedge is nearly impossible.
Q2) Even if translation exposure does not affect cash flows, it is a concern of many MNCs.
A)True
B)False
Q3) Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based MNC's reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
A)be reduced; purchasing
B)be reduced; selling
C)increase; selling
D)increase; purchasing
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Page 14
Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) MNCs oFten attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.
A)True
B)False
Q2) Which of the following purchases does not represent direct foreign investment?
A)machinery to be used in manufacturing
B)a tract of land
C)bonds and other financial assets
D)a manufacturing plant
Q3) Developing countries are mostly targeted for direct foreign investment because they have advanced technology.
A)True
B)False
Q4) 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
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.
A)True
B)False
Q2) Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
A)-$803,848
B)$5,803,848
C)$1,048,829
D)none of the above
Q3) In capital budgeting analysis, the use of a cumulative NPV is useful for:
A)determining a probability distribution of NPVs.
B)determining the time required to achieve a positive NPV.
C)determining how the required rate of return changes over time.
D)determining how the cost of capital changes over time.
E)A and B
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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Sample Questions
Q1) Firms based in ____ tend to acquire more U.S. target firms than firms in the other countries listed here.
A)Canada
B)Japan
C)Germany
D)Mexico
Q2) The sale of a subsidiary by an MNC is referred to as a divestiture.
A)True B)False
Q3) If the foreign currency ____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes ____ the change in the exchange rate.
A)appreciates; by a lesser percentage then B)depreciates; in the same proportion as C)appreciates; in the same proportion as D)appreciates; by a greater percentage than
Q4) A foreign target's expected future cash flows generally vary among different MNCs valuing the target.
A)True B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) The checklist approach:
A)requires several inspections of the country being evaluated.
B)requires the use of discriminant analysis to assess country risk.
C)requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D)involves the collection of independent opinions on country risk.
Q2) Country risk can affect an MNC's cash flows but cannot affect its cost of capital.
A)True
B)False
Q3) A ____ currency may ____ the volume of products imported by the country and therefore reduce the country's production and national income.
A)weak; increase
B)weak; reduce C)strong; increase
D)strong; reduce
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) The term "local capital structure" is used in the text to represent the:
A)average capital structure of local firms where the MNC's subsidiary is based.
B)average capital structure of local firms where the MNC's parent is based.
C)capital structure of a subsidiary of a particular MNC.
D)capital structure of a particular MNC overall (including all subsidiaries).
Q2) The cost of capital incurred by U.S.-based MNCs is primarily driven by global stock market volatility.
A)True
B)False
Q3) Which of the following is least likely to influence an MNC's capital structure?
A)stability of the MNC's cash flows
B)the MNC's credit risk
C)the MNC's access to earnings
D)the MNC's decision to invest excess cash in a Treasury bill rather than in a bank
Q4) Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.
A)True
B)False
Page 19
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.
A)appreciates; increase
B)depreciates; decrease
C)appreciates; decrease
D)depreciates; increase
E)A and B
Q2) New Hampshire Corp. has decided to issue three-year bonds denominated in 5 million Russian rubles at par. The bonds have a coupon rate of 17 percent. If the ruble is expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years 1, 2, and 3, respectively, what is the financing cost of these bonds?
A)17 percent.
B)23.18 percent.
C)22.36 percent.
D)23.39 percent.
Q3) Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.
A)True
B)False
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Page 20
Chapter 19: Financing International Trade
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Sample Questions
Q1) Consider an exporter that ships products to an importer on credit. The exporter needs funds immediately, so it obtains a loan from a bank using the account receivable as collateral. This reflects:
A)accounts receivable financing.
B)forfaiting.
C)factoring.
D)a letter of credit.
Q2) In a ________ or clearing-account arrangement, the delivery of products to the importer is compensated for by the exporter's buying back a certain amount of the product from the importer.
A)accounts receivable financing
B)compensation
C)counterpurchase
D)barter
Q3) Which of the following would be included in a commercial invoice?
A)the names of the exporter and importer
B)the price of the merchandise
C)the terms of payment
D)All of the above would be included in a commercial invoice.
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
A)borrowing domestically.
B)borrowing a portfolio of foreign currencies that are not highly correlated.
C)borrowing a portfolio of foreign currencies that are highly correlated.
D)borrowing two foreign currencies that are negatively correlated.
Q2) If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is
A)high; low
B)high; high
C)low; low
D)low; high
Q3) A large firm may finance in a foreign currency to offset a net payable position in that foreign country.
A)True
B)False
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22
Chapter 21: International Cash Management
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Sample Questions
Q1) When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.
A)True
B)False
Q2) Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?
A)6.47 percent
B)8.84 percent
C)8.50 percent
D)none of the above
Q3) If interest rate parity holds and the forward rate is expected to be an unbiased forecast of the future spot rate, then an uncovered investment in a foreign deposit will on average earn a similar effective yield as an investment in a domestic deposit.
A)True
B)False
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