International Business Finance
Review Questions
Course Introduction
International Business Finance explores the financial management practices and strategies employed by firms operating in a global environment. The course covers topics such as foreign exchange markets, international monetary system, risk management, globalization of financial markets, cross-border investment decisions, and financing options for multinational corporations. Emphasis is placed on understanding currency exposure, international financial markets and instruments, hedging strategies, and the impact of international regulations and political risks on business finance. The course equips students with analytical tools and frameworks to make informed financial decisions in the global arena.
Recommended Textbook
International Financial Management Canadian Perspective 3rd Edition by Don Brean
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) Market imperfections include all of the following except:
A) Taxes on imported goods
B) Taxes on exported goods
C) Stock markets
D) Two different classes of shareholders for one company
Answer: C
Q2) If the price of potatoes is $300 per ton,with free trade the price of tomatoes can be any of the numbers below EXCEPT
A) $600
B) $750
C) $900
D) All of these numbers can be the equilibrium price of tomatoes
Answer: D
Q3) Multinational firms gain from their global presence in the following ways except:
A) Rising marginal costs of production
B) Economies of Scale
C) Low-cost labour in foreign countries
D) Spreading R&D expenditures over global sales
Answer: A
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Page 3
Chapter 2: International Monetary System
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Q1) If,under the Gold Standard,the price of 1oz of gold was $15 or £5,what was the $/£ exchange rate?
A) $0.25/£
B) $0.33/£
C) $1/£
D) $3/£
Answer: D
Q2) Special Drawing Rights (SDR)is:
A) used to make international payments to non-member of the International Monetary Fund (IMF).
B) a "portfolio" of currencies, and its value tends to be more instable than the currencies that it is comprised of.
C) used in addition to gold and foreign exchanges, to make domestic payments.
D) a basket currency comprising major individual currencies allotted to the members of the IMF, who could then use SDRs for transactions among themselves or with IMF.
Answer: D
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4
Chapter 3: Balance of Payments
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Sample Questions
Q1) If BCA = BKA = $100 mn,then it must be true that
A) BRA = 0
B) BRA > 0
C) BRA < 0
D) BCA = BRA
Answer: C
Q2) Which of the following is true under a pure flexible exchange rate regime?
A) Balance of current account - Balance of capital account > 0
B) Balance of current account + Balance of capital account < 0
C) Balance of current account + Balance of capital account = 0
D) Balance of current account - Balance of capital account = 0x
Answer: C
Q3) A Chinese state-owned company buys a Canadian saw mill.This transaction will be recorded in the balance of payments as
A) a credit in the current account
B) a debit in the current account
C) a credit in the capital account
D) a debit in the capital account
Answer: C
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Page 5
Chapter 4: The Market for Foreign Exchange
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Sample Questions
Q1) Assume the following quotes:
1)Bank A: $1.5400/pound
2)Bank B: EURO 1.6000/pound
3)Bank C: $0.9700/EURO
a)Can a trader make a profit on these quotes?
b)Assume that the trader has $1,000,000 or the equivalent in another currency available for the transaction.What profit can the trader make?
Q2) The 3 month forward rate between British pound and the Swiss franc is £0.5/SF.The current spot rate is £0.51/SF.Assuming 360 days in a year,what is the correct statement from the below?
A) The Swiss franc is trading at a 1.96% premium to the British pound for delivery in 90 days.
B) The Swiss franc is trading at a 7.84% premium to the British pound for delivery in 90 days.
C) The Swiss franc is trading at a 1.96% discount to the British pound for delivery in 90 days.
D) The Swiss franc is trading at a 7.84% discount to the British pound for delivery in 90 days.
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Chapter 5: International Parity Relationships and Forecasting Foreign
Exchange Rates
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Sample Questions
Q1) The above mentioned scenario:
A) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds.
B) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT hold.
C) is an example of Purchasing Power Parity (PPP), and hyperinflation.
D) none of these
Q2) Deviations from interest rate parity exist for all of the following reasons except:
A) transaction costs.
B) spreads.
C) interest rate differentials.
D) capital controls.
Q3) Uncovered interest rate parity:
A) is an arbitrage condition.
B) holds most of the time.
C) is based on expectations.
D) will provide guaranteed but small profits.
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7
Chapter 6: International Banking and Money Market
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Q1) The Basle Accord calls for the following minimum bank capital
A) Tier I capital 4%, Tier II capital 4%
B) Tier I capital 4%, Tier II capital 8%
C) Tier I capital 8%, Tier II capital 4%
D) Tier I capital 8%, Tier II capital 8%
Q2) Which of the following is an example of a Eurodollar?
A) A dollar deposit in an American bank.
B) A Yen deposit in a Japanese bank.
C) A dollar deposit in a French bank.
D) Euro deposited in European bank.
Q3) Eurodollars refers to US dollar deposits when the depository bank is located outside of:
A) Europe
B) Europe, and the Caribbean
C) Europe, the Caribbean, or Asia
D) the United States
Q4) Explain Eurocommerical papers.
Q5) How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?
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Chapter 7: International Bond Market
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Sample Questions
Q1) A "global bond" issue:
A) is a very large international bond offering by several borrowers pooled together.
B) is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets.
C) has higher yields for the purchasers.
D) has a lower liquidity.
Q2) Convertible bonds are a type of:
A) straight-fixed rate bonds.
B) euro-medium term notes.
C) floating-rate notes.
D) equity-related bonds.
Q3) Taxes on interest paid by nonresidents are called:
A) interest taxes.
B) non-resident taxes.
C) non-resident interest taxes.
D) withholding taxes.
Q4) What happens to the present value of the bonds in 4.,if the implied yield to maturity increases by 1%?
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Chapter 8: International Equity Markets
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Q1) Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share)are trading for $40 on the New York Stock exchange.There is no arbitrage possible.What is the current SF/US$ exchange rate?
A) SF 0.8/$
B) SF 1/$
C) SF 1.25/$
D) SF 4/$
Q2) A market in which investors can buy and sell shares quickly at the price close to the current quoted price is called:
A) Efficient market.
B) Liquid market.
C) Regulated market.
D) Optimal market.
Q3) A liquid stock market is one in which:
A) investors can buy and sell shares quickly at close to the current quoted prices.
B) investors can buy shares quickly at close to the current quoted prices.
C) investors can sell shares quickly at close to the current quoted prices,
D) investors can buy and sell shares quickly above the current quoted prices.
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Chapter 9: Futures and Options on Foreign Exchange
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Q1) If you have a short position in one futures contract,the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be:
A) $1,425.
B) $2,000.
C) $2,325.
D) $3,425.
Q2) The "open interest" shown in currency futures quotations is:
A) the total number of people indicating interest in buying the contracts in the near future.
B) the total number of people indicating interest in selling the contracts in the near future.
C) the total number of people indicating interest in buying or selling the contracts in the near future.
D) the total number of long or short contracts outstanding for the particular delivery month.
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11
Chapter 10: Interest Rate and Currency Swaps
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Q1) ABC Corporation has entered into a 10-year interest rate swap with a swap bank.ABC Corp.pays the swap bank a fixed-rate of 6 percent annually on a notional amount of EUR100,000,000 and receives LIBOR <sub>-</sub> ½ percent.What is the price of the swap on the seventh reset date,assuming that the fixed-rate at which ABC can borrow has decreased to 5%.
Q2) Which firms will benefit from a currency swap?
A) Neither firm.
B) The Canadian firm only.
C) Both firms.
D) Need more information.
Q3) Which of the following is NOT true about swap banks?
A) A swap bank can be an international commercial bank.
B) A swap bank can be an investment bank.
C) A swap bank can be a central bank.
D) A swap bank can be an independent operator.
Q4) Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR - 1 percent.Determine the price of the swap on the first reset date,assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged.
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Chapter 11: International Portfolio Investment
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Sample Questions
Q1) Which of the following statements is true about the OIP?
A) It has lower variance then ODP.
B) It has higher expected return then ODP.
C) It is the same for all investors regardless their country of residence.
D) None of these.
Q2) Calculate the exchange rate return from a Canadian perspective.(Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)
A) -9.38
B) -8.57%
C) 8.57%
D) 9.38
Q3) In abbreviation ADR,letter D stands for:
A) Depreciation.
B) Devaluation.
C) Denomination.
D) None of these.
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Chapter 12: Management of Economic Exposure
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Q1) After the appreciation of the Canadian dollar,firm ABC loses market share in the United States because American firms can sell their products at a lower price.This is an example of:
A) Competitive effect.
B) Conversion effect.
C) Exchange rate effect.
D) Unfair competition.
Q2) Based on the following information about the future possible exchange rates and the value of your foreign assets,you have computed Var(S)= 0.00666667 and Cov(P,S)=
12.If you use the appropriate forward hedge,what will be the value of your hedged position in a situation when the future spot exchange rate is 1.4$/£?
State Prob.P* S($/£)P( = SP*)
1 1/3 £1000 1.4 $1,400
2 1/3 £1,000 1.5 $1,500
3 1/3 £1,100 1.6 $1,760
A) $1500
B) $1553
C) $1580
D) $1620
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Page 14
Chapter 13: Management of Transaction Exposure
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Sample Questions
Q1) Which of the following is a financial hedge?
A) Invoice currency selection
B) Lead/lag strategy
C) Exposure netting
D) Money market hedge
Q2) Sonnenschein A.G.,a German retailer of solar panels just bought panels for US $100,000 to be paid in 120 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Sonnenschein A.G.You check with your banker and find out the following: The spot bid and ask rates are USD 1.1001/EUR and USD 1.0953/EUR respectively and the 120-day forward rates are EUR 0.8850/USD and EUR 0.8950/USD.Determine the net payables if Sonnenschein uses a forward hedge to manage its payables.
Q3) Assume that the forward rate is the best predictor of the future spot rate.The future dollar cost of meeting this obligation using the option hedge is:
A) $6,450,000
B) $6,545,400
C) $6,653,833
D) $6,880,734
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15
Chapter 14: Management of Translation Exposure
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Q1) A foreign operation which is financially or operationally interdependent with the Canadian parent company such that the exposure to exchange rate changes is similar to the exposure that would exist had the transactions of the foreign operation been undertaken directly by the Canadian parent is called a/an:
A) interdependent foreign operation.
B) integrated foreign operation.
C) self-sustaining foreign operation.
D) Has no special name.
Q2) Explain the differences between an integrated foreign operation and a self-sustaining foreign operation.
Q3) Translation exposure refers to:
A) accounting exposure.
B) the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC.
C) the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm.
D) All of these.
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Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions
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Sample Questions
Q1) Political risk can be evaluated by studying:
A) the host country's political and government system.
B) key economic indicators.
C) regional security.
D) All of these.
Q2) Cross-border acquisition involves:
A) building new production facilities in a foreign country.
B) buying existing foreign business.
C) purchasing minor intangible assets in existing foreign business.
D) None of these.
Q3) How can firms establish a wholly owned subsidiary in a foreign country? What are the advantages and disadvantages of each method?
Q4) Political risk refers to:
A) the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country.
B) macro-economic risks.
C) micro-economic risks.
D) bankruptcy or high inflation rates.
Page 17
Q5) Explain the role of market imperfections in FDI.
Q6) How can Export Development Canada (EDC)help firms to deal with political risk?
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Page 18
Chapter 16: International Capital Structure and the Cost of Capital
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Q1) Assume that ABC Corporation is a leveraged company with the following information.Its marginal income tax rate is 35%,its average income tax rate is 25%,and its before tax-cost of borrowing is 6%.The firm's domestic beta is 1.2 and its world market beta is 1.The domestic market return is 10% and the world market return is 11%.The risk-free rate is 4%.The firm's debt-to-equity ratio is 1:3.Determine the firm's weighted average cost of capital if capital markets are segmented.
Q2) Which of the following factors is not important when a firm chooses its subsidiary's financial structure?
A) Corporate tax rates
B) Value-added taxes
C) Political risk
D) Cost of capital
Q3) The cost of equity capital is:
A) the expected return on the firm's stock that investors require.
B) frequently estimated by using the Capital Asset Pricing Model (CAPM).
C) generally considered to be a linear function of the systematic risk inherent in the security.
D) All of these.
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Chapter 17: International Capital Budgeting
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Q1) A real option is:
A) a commodity option.
B) an option that has 90% probability or higher to be in the money at the time of maturity.
C) an ability to close the production line.
D) None of these.
Q2) The option to quit a foreign project early is called:
A) timing option.
B) abandonment option.
C) growth option.
D) exercise option.
Q3) Which of the following is not an example of a real option?
A) Timing option
B) Abandonment option
C) Growth option
D) Exercise option
Q4) Which cash flows are relevant for the international capital budgeting analysis?
Q5) Is it possible that a project has a positive APV from the subsidiary's perspective and a negative APV from the parent's perspective?
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Chapter 18: Multinational Cash Management
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Q1) Assuming that the inter-affiliate cash flows are uncorrelated with one another,calculate the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members: (Round your final answer to nearest whole dollar) \[\begin{array} { l c c }
\text { Affiliate } & \begin{array} { c }
\text { Expected } \\
\text { Transactions }
\end{array} & \begin{array} { c }
\text { Standard } \\
\text { Deviation }
\end{array} \\
\hline \text { U.S. } & \$ 100,000 & \$ 40,000 \\
\text { Canada } & \$ 150,000 & \$ 60,000 \\
\text { Mexico } & \$ 175,000 & \$ 30,000 \\
\text { Chile } & \$ 200,000 & \$ 70,000
\end{array}\]
A) 60,000
B) 88,122
C) 104,881
D) 120,103
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Page 21
Chapter 19: Exports and Imports
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Q1) Which of the following is the fundamental forms of countertrade?
A) Barter.
B) Counterpurchase.
C) Buy-back.
D) All of these are fundamental forms of countertrade.
Q2) The ________ sends a purchase order to the ________. The ________ applies to his bank for a letter of credit.
A) importer; exporter; exporter
B) exporter; importer; importer
C) importer; exporter; importer
D) exporter; importer; exporter
Q3) Which of the following financial support mechanisms of export is offered by the EDC?
A) Note purchases.
B) Lines of credits.
C) Security compliance loan.
D) All of these.
Q4) Explain the major differences between international and domestic trade.
Q5) Name and explain the three most important documents in a typical international trade transaction.
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Chapter 20: International Tax Environment
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Q1) The three basic types of taxation are:
A) income tax, withholding tax, and value-added tax.
B) income tax, withholding tax, business tax.
C) withholding tax, value-added tax, corporate tax.
D) personal tax, corporate tax, and operating tax.
Q2) A tax levied on passive income earned by an individual or a corporation of one country within the tax jurisdiction of another is called:
A) foreign income tax.
B) value-added tax.
C) investment tax.
D) withholding tax.
Q3) A product sells for EUYR 1,6000 in the first production stage,EUR2,000 the second and EUR2,700 in the third and last production stage.If the value-added tax (VAT)rate is 20%,what would be the incremental VAT at each state of production?
Q4) What are the major ways in which countries levy taxes?
Q5) How can double taxation result out of the two major ways to determine who has to pay taxes?
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Page 23
Chapter 21: Corporate Governance Around the World
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Q1) Private benefits of corporate control:
A) are cash flows from owning equity.
B) are equally shared by all investors.
C) are not equally shared by all investors.
D) do not exist.
Q2) Private benefits of corporate control will tend to be higher in:
A) in French civil law countries than in English common law countries.
B) in English common law countries than in French civil law countries.
C) in French civil law countries than in Scandinavian civil law countries.
D) In English common law countries than in German civil law countries.
Q3) The main weakness of the 'public corporation' is:
A) too many shareholders, which makes it difficult to make corporate decision.
B) relatively high corporate income tax rates.
C) conflicts of interest between managers and shareholders.
D) conflicts of interests between shareholders and bondholders.
Q4) Managers may inappropriately use the residual control rights:
A) to pay themselves exorbitant perquisites.
B) not to divert assets through transfer pricing.
C) to take on unprofitable projects.
D) to invest in positive NPV projects.
Page 24
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