International Business Finance
Exam Solutions
Course Introduction
International Business Finance explores the financial issues facing firms and individuals operating in an increasingly globalized marketplace. The course examines key topics such as foreign exchange markets, international monetary systems, risk management, and cross-border investment analysis. Students gain an understanding of how international financial environments affect corporate decision-making, including capital structure, sourcing of funds, international investment strategies, and financial management of multinational enterprises. Real-world case studies and current events are integrated to help students apply theoretical knowledge to practical financial challenges and opportunities encountered in the global business environment.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
1676 Verified Questions
1676 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) A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.
A)True
B)False
Answer: True
Q2) A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.
A)True
B)False
Answer: False
Q3) Due to the risks involved in international business, firms should:
A) only consider international business in major countries.
B) maintain international business to no more than 20% of total business.
C) maintain international business to no more than 35% of total business.
D) none of the above
Answer: D
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) Which is not a concern about the North American Free Trade Agreement (NAFTA)?
A) its impact on U.S. inflation.
B) its impact on U.S. unemployment.
C) lower environmental standards in Mexico.
D) different health laws for workers in Mexico.
Answer: A
Q2) ____ represent aid, grants, and gifts from one country to another.
A) Transfer payments
B) Factor income
C) The balance of trade
D) The balance of payments
E) The capital account
Answer: A
Q3) 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
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Page 4
Chapter 3: International Financial Markets
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Sample Questions
Q1) The international money market is primarily served by:
A) the governments of European countries, which directly intervene in foreign currency markets.
B) government agencies such as the International Monetary Fund that enhance development of countries.
C) several large banks that accept deposits and provide loans in various currencies.
D) small banks that convert foreign currency for tourists and business visitors.
Answer: C
Q2) The preferences of corporations and governments to borrow in foreign currencies 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
Q3) The strike price is also known as the premium price.
A)True
B)False
Answer: False
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Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:
A) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
B) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
C) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.
D) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.
Q2) Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen 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
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6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) Currency options sold through an options exchange:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
Q2) Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A) purchase a call option on francs.
B) sell a futures contract on francs.
C) obtain a forward contract to purchase francs forward.
D) all of the above are appropriate strategies for the scenario described.
Q3) A forward rate for a currency is said to exhibit a discount if
A) the forward rate exceeds the existing spot rate.
B) the forward rate is less than the existing spot rate.
C) the forward rate exceeds the expected future spot rate.
D) the forward rate is less than the expected future spot rate.
E) none of the above
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Page 7
Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries. A) weakening; increase B) weakening; decrease C) strengthening; increase D) strengthening; decrease
Q2) All European countries now use the euro as their currency.
A)True
B)False
Q3) Among the reasons for government intervention are:
A) to smooth exchange rate movement.
B) to establish implicit exchange rate boundaries. C) to respond to temporary disturbances.
D) all of the above
Q4) Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency.
A)True
B)False
Q2) Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts.
A)True
B)False
Q3) Which of the following is not true regarding interest rate parity (IRP)?
A) When interest rate parity holds, covered interest arbitrage is not possible.
B) When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
C) When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
D) When covered interest arbitrage is not feasible, interest rate parity must hold.
E) All of the above are true.
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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) Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%.
According to the international Fisher effect, British pound's spot exchange rate should ____ by about ____ over the year.
A) depreciate; 1.9%
B) appreciate; 1.9%
C) depreciate; 3.94%
D) appreciate; 3.94%
Page 10
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Market-based forecasting involves the use of historical exchange rate data to predict future values.
A)True
B)False
Q2) Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
A) depreciation in the Australian dollar's value over the next year.
B) appreciation in the Australian dollar's value over the next year.
C) no change in the Australian dollar's value over the next year.
D) information on future interest rates is needed to answer this question.
Q3) The most sophisticated forecasting techniques provide consistently accurate forecasts.
A)True
B)False
Q4) The potential forecast error is larger for currencies that are more volatile.
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 expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC's transaction exposure is relatively ____.
A) negatively; high
B) negatively; low
C) positively; low
D) none of the above
Q2) Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.
A)True
B)False
Q3) According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
A) are; are not
B) are; are
C) are not; are not
D) are not; are
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
A)True
B)False
Q2) The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
A)True
B)False
Q3) 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
Q4) To hedge a payable position with a currency option hedge, an MNC would write a call option.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) All MNCs are subject to transaction exposure.
A)True
B)False
Q2) Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies.
A)True
B)False
Q3) If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.
A) negative
B) adversely affected
C) favorably affected
D) unaffected
Q4) Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.
A)True
B)False
Page 14
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) Developing countries are mostly targeted because they have advanced technology.
A)True
B)False
Q2) Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.
A)True
B)False
Q3) 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
Q4) 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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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) If a foreign project is financed with a subsidiary's retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.
A)True
B)False
Q2) If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.
A)True
B)False
Q3) Assuming that a subsidiary is wholly owned, a subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.
A)True
B)False
Q4) The required rate of return of a project is ____ the MNC's cost of capital.
A) greater than
B) less than
C) the same as
D) any of the above, depending on the specific project
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Page 16
Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different.
A)True
B)False
Q2) Firms based in ____ tend to acquire more U.S. target firms than the other countries listed here.
A) Canada
B) Japan
C) Germany
D) Mexico
Q3) Downsizing reduces expenses but may also reduce productivity and revenue.
A)True
B)False
Q4) The initial outlay for a project in a foreign country may decline if property values in that country decline.
A)True
B)False
Page 17
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) Country risk can affect an MNC's cash flows but cannot affect its cost of capital.
A)True
B)False
Q2) Insurance purchased to cover the risk of expropriation ____, and will typically cover
A) will be the same for all firms; only a portion of the firm's total exposure.
B) will be the same for all firms; all of the firm's total exposure.
C) will be dependent on the firm's risk; all of the firm's total exposure.
D) will be dependent on the firm's risk; only a portion of the firm's total exposure.
Q3) ____ is (are) not a form of political risk.
A) Exchange rate movements
B) Attitude of consumers in the host country
C) Actions of the host government
D) Blockage of fund transfers
E) All of the above are forms of political risk
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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) One argument for why subsidiaries should be only partly-owned by the parent is:
A) that the potential conflict of interests between the MNC's managers and shareholders is avoided.
B) that the potential conflict of interests between the MNC's majority shareholders and minority shareholders is avoided.
C) that the potential conflict of interests between the MNC's existing creditors is avoided.
D) to motivate subsidiary managers by allowing them partial ownership.
Q3) When assuming that investors in the U.S. are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.
A)True
B)False
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) Assume that a yield curve's shape is caused by liquidity. An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is:
A) flat.
B) inverted.
C) upward-sloping.
D) downward sloping.
Q2) An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
A) convert to floating-rate debt.
B) hedge exchange rate risk.
C) lock in the interest payments on debt.
D) remove the default risk of its debt.
Q3) 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
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20
Chapter 19: Financing International Trade
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Sample Questions
Q1) The sale of accounts receivable to a third party for a discount is called factoring.
A)True
B)False
Q2) The ____ is a self-sustaining federal agency responsible for insuring direct U.S. investments in foreign countries against the risk of currency inconvertibility, expropriation, and other political risks.
A) Export-Import Bank of the United States
B) Private Export Funding Corporation
C) Overseas Private Investment Corporation
D) none of the above
Q3) Which of the following payment terms provides the supplier with the greatest degree of protection?
A) letters of credit.
B) consignment.
C) prepayment.
D) drafts (sight/time).
Q4) A draft drawn on and accepted by a bank is called a banker's acceptance.
A)True
B)False
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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) 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
Q3) The effective financing rate:
A) adjusts the nominal interest rate for inflation over the period of concern.
B) adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern.
C) adjusts the nominal rate for a change in foreign interest rates over the period of concern.
D) adjusts the nominal rate for the forward discount (or premium) over the period of concern.
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Chapter 21: International Cash Management
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Sample Questions
Q1) Lockboxes are post office box numbers assigned to employees for picking up their paychecks.
A)True
B)False
Q2) A ____ allows customers to send payments to a post office box number.
A) bilateral netting system
B) multilateral netting system
C) lockbox
D) preauthorized payment
Q3) Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries.
A)True
B)False
Q4) When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.
A)True
B)False
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