International Business Finance
Exam Answer Key
Course Introduction
International Business Finance explores the financial management practices and strategies used by multinational corporations operating in a global environment. The course covers topics such as foreign exchange markets, international financial markets and institutions, currency risk management, international investment and financing decisions, and the impact of political and economic risks on global operations. Emphasis is placed on understanding the complexities of cross-border transactions, global capital budgeting, and the application of financial tools and techniques necessary for effective decision-making in an international context.
Recommended Textbook
Fundamentals of Multinational Finance 4th Edition by Michael
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Page 2
H. Moffett
Chapter 1: Current Multinational Challenges and the Global Economy
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Sample Questions
Q1) Refer to Table 1.1.A production unit in Austria has a/an ________ over a production unit in Russia in ________.
A)absolute disadvantage; digital cameras
B)absolute disadvantage; snowboards
C)absolute advantage; both cameras and snowboards
D)none of the above
Answer: C
Q2) The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the
A)domestic phase.
B)multinational phase.
C)international trade phase.
D)import-export banking phase.
Answer: C
Q3) Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities.
A)True
B)False
Answer: True
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Chapter 2: Financial Goals and Corporate Governance
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Q1) Anglo-American equity markets are characterized by widespread ownership of shares. In other parts of the world ownership is often dominated by consortiums of controlling shareholders.Which of the following is NOT an example of a common consortium of controlling shareholders?
A)Japanese keiretsus
B)South Korean chaebols
C)U.S. labor unions
D)All of the above are common controlling consortiums.
Answer: C
Q2) Under the shareholder wealth maximization model of corporate governance it is assumed that the long-term or "loyal" stockholders should influence corporate strategy more than the transient portfolio investor.
A)True
B)False
Answer: False
Q3) Systematic risk can be eliminated through portfolio diversification.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The International Monetary System
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Q1) Based on the premise that,other things equal,countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade.
A)True
B)False
Answer: False
Q2) Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914.Today we have several different exchange rate regimes in use,but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand.Occasionally several parties still call for the "good old days" and a return to the gold standard.Develop an argument as to why this is a good idea.
Answer: The gold standard forces a nation to maintain sufficient reserves of gold to back its currency's value.This helps control inflation,as a country cannot print additional money without sufficient gold to back it up.The gold standard eases international transactions as there is little uncertainly about exchange rates for trade with foreign countries.A stable currency could also act as a deterrent to the large trade deficits developed by some countries such as the United States.
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Page 5
Chapter 4: The Balance of Payments
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Q1) The authors identify a tip for understanding BOP accounting.They recommend that you "follow the cash flow."
A)True
B)False
Q2) Construct ,in a static (accounting)form the equation for a nations GDP as presented by the authors.Identify each term (e.g.,r = interest rate).How does a positive BOP account balance affect a country's GDP?
Q3) The United States experienced a balance of trade ________ during the 1990s and a balance of trade ________ during the 2000s.
A)surplus; surplus
B)surplus; deficit
C)deficit; deficit
D)deficit; surplus
Q4) According to the authors,the following types of transactions dominate the balance of payments:
A)the exchange of guns for butter.
B)the exchange of stocks and bonds.
C)the exchange of goods and services.
D)the exchange of real and financial assets.
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Chapter 5: Current Multinational Financial Challenges: the
Credit Crisis of 2007 - 2009
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Q1) Which of the following is NOT a result of the Financial Reform Law of 2010?
A)An Office of Financial Research was established.
B)The SEC can sue lawyers, accountants, and other professionals, who know about a deceptive act, even if they weren't the wrongdoer.
C)Institutions must disclose the amount of short selling in each stock.
D)All of the above are characteristics of the Financial Reform Law of 2010.
Q2) One of the concerns about CDOs from the very beginning was that the CDO originator had no continuing link or responsibility to the mortgage.
A)True
B)False
Q3) Portfolio Theory has proven to be remarkably accurate in the idea that,whereas a single large subprime borrower constituted significant risk,a portfolio of subprime borrowers which was securitized did not.
A)True
B)False
Q4) To the best of your ability highlight the events from July 2007 through September 30,2008 that culminated with the 777 point fall in the DJIA.
Page 7
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Chapter 6: The Foreign Exchange Market
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Q1) ________ make money on currency exchanges by the difference between the ________ price,or the price they offer to pay,and the ________ price,or the price at which they offer to sell the currency.
A)Dealers; ask; bid
B)Dealers; bid; ask
C)Brokers; ask; bid
D)Brokers; bid; ask
Q2) Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.
A)True
B)False
Q3) From the viewpoint of a British investor,which of the following would be a direct quote in the foreign exchange market?
A)SF2.40/£
B)$1.50/£
C)£0.55/euro
D)$0.90/euro
Q4) Identify and explain the three functions of the foreign exchange market.
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Chapter 7: International Parity Conditions
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Sample Questions
Q1) Assume a nominal interest rate on one-year U.S.Treasury Bills of 3.80% and a real rate of interest of 2.00%.Using the Fisher Effect Equation,what is the exact expected rate of inflation in the U.S.over the next year?
A)1.84%
B)1.80%
C)1.76%
D)1.72%
Q2) If the forward exchange rate is an unbiased predictor of future spot rates,then future spot rates will always be equal to current forward rates.
A)True
B)False
Q3) One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is $1.3225/euro.What is the expected spot rate in one year if the international Fisher effect holds?
A)$1.3315/euro
B)$1.3135/euro
C)$1.3225/euro
D)None of the above
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9
Chapter 8: Foreign Currency Derivatives and Swaps
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Sample Questions
Q1) A call option whose exercise price is less than the spot rate is said to be ________.
A)in-the-money
B)at-the-money
C)out-of-the-money
D)under-the-spot
Q2) Which of the following is NOT a factor in determining the price of a currency option?
A)the present spot rate
B)the time to maturity
C)the standard deviation of the daily spot price movement
D)All of the above are factors in determining the premium price.
Q3) Refer to Instruction 8.1.Choosing strategy #1 will
A)guarantee the lowest average annual rate over the next three years.
B)eliminate credit risk but retain repricing risk.
C)maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
D)preclude the possibility of sharing in lower interest rates over the three-year period.
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Q1) The authors compromise as to the key factors for exchange rate determination.They conclude that ________ are important in the short run,but that ________ determines long run exchange rates.
A)Fisher effect; PPP
B)asset markets, interest rates, and expectations; PPP
C)PPP; Fisher effect
D)Fisher effect; asset prices, interest rates, and expectations
Q2) When country Central banks work together to intervene and push a particular currency's value in a desired direction,this is known as coordinated intervention.
A)True
B)False
Q3) Argentina's economic performance in the 1990s while their peso was pegged to the U.S.dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.
A)high; high
B)low; low
C)low; high
D)high; low
Q4) Describe the Russian ruble collapse through August of 1998.
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Chapter 10: Transaction and Translation Exposure
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Sample Questions
Q1) A balance sheet hedge is the main technique for managing ________.
A)transaction
B)operating
C)translation
D)money market
Q2) Refer to Instruction 10.1.Plains States could hedge the Euro receivables in the money market.Using the information provided,how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S.investment rate?
A)$1,250,000
B)$1,724,880
C)$1,674,641
D)$1,207,371
Q3) Refer to Instruction 10.1.If Plains States chooses to implement a money market hedge for the Euro receivables,how much money will the firm borrow today?
A)euro 1,201,923
B)$1,201,923
C)euro 1,196,172
D)$1,196,172
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Chapter 11: Operating Exposure
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Sample Questions
Q1) The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.
A)True
B)False
Q2) Operating exposure referred to as MEDIUM RUN:EQUILIBRIUM has which of the following set of characteristics?
A)It lasts two to five years, has complete pass-through of exchange rate changes, and existing competitors begin partial responses.
B)It lasts for less than one year, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.
C)It lasts for more than five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.
D)It lasts two to five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.
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Chapter 12: The Global Cost and Availability of Capital
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Sample Questions
Q1) Other things equal,an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing.
A)True
B)False
Q2) Which of the following is NOT a contributing factor to the segmentation of capital markets?
A)excessive regulatory control
B)perceived political risk
C)anticipated foreign exchange risk
D)All of the above are contributing factors.
Q3) Your authors identify three firm and market characteristics that,in part,determine differences in a firm's cost of capital in a purely domestic market versus a global capital market.What are these three market characteristics and how do they help differentiate a firm's cost of capital?
Q4) Capital market imperfections leading to financial market segmentation include
A)asymmetric information between domestic and foreign-based investors
B)high securities transaction costs
C)foreign exchange risks
D)All of the above.
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Chapter 13: Sourcing Equity and Debt Globally
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Q1) Of the following,which was NOT cited by the authors as a valuable function provided by the Eurocurrency market?
A)Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity.
B)Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the U.S. dollar.
C)The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs.
D)All of the above were cited by the authors.
Q2) ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are ________.
A)facilitated
B)unfacilitated
C)sponsored
D)unsponsored
Q3) How does market segmentation impact the effect on share prices from cross-listing on foreign stock exchanges?
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15
Chapter 14: Multinational Tax Management
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Sample Questions
Q1) Which of the following is NOT a disadvantage of the value-added tax?
A)The tax may have an inflationary impact.
B)It is a regressive tax.
C)It increases the total tax burden.
D)All are disadvantages.
Q2) A tax that is a form of social redistribution of income is defined as a/an ________ tax.
A)un-American
B)transfer
C)flat
D)none of the above
Q3) A value-added tax has gained widespread use in Western Europe,Canada,and parts of Latin America.
A)True
B)False
Q4) Explain the worldwide and territorial approaches of national taxation.The authors state that the United States uses both approaches.How can this be? Give an example of each taxation approach.
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Page 16
Chapter 15: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) A/n ________ would be an example of an internalization advantage for an MNE.
A)patent
B)economy of scale
C)unique source of raw materials
D)possession of proprietary information
Q2) The O in OLI refers to an advantage in a firm's home market that is ________.
A)operator independent
B)owner-specific
C)open-market
D)official designation
Q3) Which of the following would NOT be considered a non-tariff barrier to trade?
A)inconsistent customs and administrative entry procedures
B)unduly stringent or discriminating standards imposed on imports in the name of protecting health, safety, and quality
C)established import procedures that make importing more difficult
D)All of the above are non-tariff trade barriers.
Q4) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
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Chapter 16: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Affiliate firms are consolidated on the parent's financial statements on a ________ basis.
A)prorated
B)50%
C)75%
D)100%
Q2) Refer to Table 16.1.The NPV for the British investment is estimated at ________.
A)$3,092
B)$6,420
C)£3,092
D)$0
Q3) Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%.If Benson is in a 30% tax bracket,and finances 40% of assets with debt,what is the firm's wacc?
A)11.20%
B)10.36%
C)9.72%
D)7.68%
Q4) Compared to a greenfield investment,list advantages and disadvantages of a cross-border merger or acquisition.
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Chapter 17: International Portfolio Theory and Diversification
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Q1) The maximum benefits of portfolio construction are obtained when the correlation between assets is ________.
A)-1.0
B)0.0
C)+1.0
D)none of the above
Q2) ________ risk is measured with beta.
A)Systematic
B)Unsystematic
C)International
D)Domestic
Q3) A U.S.investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S.dollar by 8%.What is the investor's total return?
A)22.00%
B)23.12%
C)6.00%
D)4.88%
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Chapter 18: Working Capital Management
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Q1) An Edge Act corporation is a subsidiary of a U.S.bank located outside of the U.S.and incorporated to engage in international banking and financing operations.
A)True
B)False
Q2) In an inflationary economy,demand for credit usually exceeds supply.
A)True
B)False
Q3) Which of the following is NOT a correspondent banking service?
A)accepting bank drafts
B)honoring letters of credit
C)furnishing credit informational
D)All of the above are correspondent bank activities.
Q4) Unbundling allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.
A)True
B)False
Q5) In principle,the firm tries to minimize its NWC balance.
A)True
B)False
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Chapter 19: International Trade Finance
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Q1) A fundamental problem of international trade is
A)authorities in the importing country may disallow the consular invoice.
B)authorities in the exporting country may refuse to issue a consular invoice.
C)buyer and seller may act in collusion.
D)buyer and seller may not completely trust each other.
Q2) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?
Q3) In a typical forfaiting agreement the importer and exporter agree between themselves on a series of imports to be paid for over a period of time,typically three to five years.
A)True
B)False
Q4) A signed ________ is issued by the exporter and contains a precise description of the merchandise.
A)packing list
B)bill of lading
C)commercial invoice
D)banker's acceptance
Q5) What is the trade dilemma and how is the dilemma generally solved?
Q6) What is the Import-Export Bank and how can it aid in export financing?
Page 21
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