International Economics Exam Bank
Course Introduction
International Economics explores the principles and theories that govern economic interactions among countries. The course examines topics such as international trade, exchange rates, balance of payments, and the effects of globalization on economies. Students will analyze the motivations behind trade policies, the impact of tariffs and quotas, and the role of international organizations like the IMF and WTO. By integrating real-world case studies and current global issues, the course provides a comprehensive understanding of how nations connect and compete in the global marketplace, and how economic policy decisions influence international prosperity and stability.
Recommended Textbook
Multinational Business Finance 15th Edition by David K. Eiteman
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Page 2
Chapter 1: Multinational Financial Management: Opportunities and Challenges
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Sample Questions
Q1) Several of the world's major currency exchange rates follow a specific quotation convention that is the result of tradition and history. The exchange rate between the U.S. dollar and the British pound is always quoted as "dollars per pound."
A)True
B)False
Answer: True
Q2) The Eurocurrency market continues to thrive because it is a large international money market relatively free from governmental regulation and interference. Recent events may lead to greater regulation.
A)True
B)False Answer: True
Q3) For firms competing in a world characterized by oligopolistic competition, strategic motives can be subdivided into proactive and defensive investments.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The International Monetary System
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Sample Questions
Q1) Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, a country that has given up their own sovereignty over monetary policy is considered to have:
A) a residual agreement.
B) hard pegs.
C) soft pegs.
D) floating arrangements.
Answer: B
Q2) Regime structures like the gold standard required no cooperative policies among countries, only the assurance that all would abide by the "rules of the game."
A)True
B)False
Answer: True
Q3) Which of the following is NOT an attribute of the "ideal" currency?
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
Answer: D
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Page 4
Chapter 3: The Balance of Payments
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Sample Questions
Q1) The authors identify four distinct periods of capital mobility since 1860. Which do they term as a "period of global economic destruction"?
A) 1860 - 1914
B) 1914 - 1945
C) 1945 - 1971
D) 1971 - 2007
Answer: B
Q2) The balance of payments as applied to a course in international finance may be defined as:
A) the amount still owed by an exporting firm after making an initial down payment.
B) the amount still owed by governments to the International Monetary Fund.
C) the measurement of all international economic transactions between the residents of a country and foreign residents.
D) the amount of a country's merchandise trade deficit or surplus.
Answer: C
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5
Chapter 4: Financial Goals and Corporate Governance
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Sample Questions
Q1) Unsystematic risk can be defined as:
A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk of the market in general.
Q2) The goal of all international corporations is to maximize shareholder wealth.
A)True
B)False
Q3) Which of the following operational goals for the international firm may be incompatible with the others?
A) maintaining a strong local currency
B) maximization of after-tax income
C) minimization of the firm's effective global tax burden
D) Each of these goals may be incompatible with one or more of the others.
Q4) The stakeholder capitalism model (SCM) holds that total risk (operational and financial) is more important than just systematic risk.
A)True
B)False
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6
Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) As you might expect, the foreign exchange daily trading volume in in New York City is roughly twice as large as the daily trading volume in London.
A)True
B)False
Q2) ________ 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
Q3) The authors identify two tiers of foreign exchange markets:
A) bank and nonbank foreign exchange.
B) commercial and investment transactions.
C) interbank and client markets.
D) client and retail market.
Q4) The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish. List and explain three functions of the foreign exchange market.
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) ________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.
A) Fisher-open
B) Fisher-closed
C) The Fisher Effect
D) none of the above
Q2) 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%
Q3) Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete.
A)True
B)False
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8
Chapter 7: Foreign Currency Derivatives: Futures and Options
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Sample Questions
Q1) The time value is asymmetric in value as you move away from the strike price (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).
A)True
B)False
Q2) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.
A)True
B)False
Q3) The Phi of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the foreign interest rate.
D) expected change in the option premium for a small change in the domestic interest rate.
Q4) List and explain three "Greek" elements and their impact on a call option premium.
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Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.
A)True
B)False
Q2) The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:
A) interest rate risk.
B) credit risk.
C) counterparty risk.
D) clearinghouse risk.
Q3) A/an ________ is a contract to lock in today interest rates over a given period of time.
A) forward rate agreement
B) interest rate future
C) interest rate swap
D) none of the above
Q4) A basis point is one-tenth of one percent.
A)True
B)False
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Chapter 9: Foreign Exchange Rate Determination and Intervention
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Sample Questions
Q1) Examples of a business motivation for long-run exchange rate forecasts include all but which of the following?
A) a major capital investment in a foreign country
B) the desire to hedge a 90-day security
C) a portfolio manager considering investing in foreign securities
D) All of the above are examples of a business motivation for long-run exchange rate forecast.
Q2) ________ is the active buying and selling of the domestic currency against foreign currencies.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Federal Funding
Q3) The large and liquid capital and currency markets follow many of the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.
A)True
B)False
Page 11
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Chapter 10: Transaction Exposure
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Sample Questions
Q1) There are as many different approaches to exposure management as there are firms and no real consensus exists regarding the best approach. Discuss the following theoretical dimensions to currency hedging: optimal hedge ratio, hedge symmetry, hedge effectiveness and hedge timing.
Q2) Remaining unhedged is NOT an option when dealing with foreign exchange transaction exposure.
A)True
B)False
Q3) A firm's risk tolerance is a combination of management's philosophy toward transaction exposure and the specific goals of treasury activities.
A)True
B)False
Q4) The commonly used 100% forward contract cover is a symmetric hedge. A)True B)False
Q5) Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against.
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Page 12
Chapter 11: Translation Exposure
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Sample Questions
Q1) A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:
A) have a 2:1 ratio of assets to liabilities.
B) have a 2:1 ratio of liabilities to assets.
C) have a 2:1 ratio of liabilities to equity.
D) be equal.
Q2) Most countries specify the translation method to be used by a foreign subsidiary based on its business operations or the functional currency. Explain both subsidiary characterization criteria and the one adopted in the United States.
Q3) The current rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
Q4) According to your authors, the main purpose of translation is:
A) to prepare consolidated financial statements.
B) to help management assess the performance of foreign subsidiaries.
C) to act as an interpreter for managers without foreign language skills.
D) none of the above
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13
Chapter 12: Operating Exposure
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Sample Questions
Q1) After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments.
A)True
B)False
Q2) An unexpected change in exchange rates impacts a firm's expected cash flows at three levels, depending on the time horizon used (Short Run, Medium Run, and Long Run).
Describe the three operating exposure's phases of adjustment assuming that parity conditions do not hold among foreign exchange rates, national inflation rates, and national interest rates (disequilibrium).
Q3) Currency swaps are exclusively for periods of time under one year.
A)True
B)False
Q4) Unexpected changes in exchange rates is never good news for a firm's operating income.
A)True B)False
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Page 14
Chapter 13: Global Cost and Availability of Capital
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Sample Questions
Q1) A firm whose equity has a beta of 1.0:
A) has greater systematic risk than the market portfolio.
B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true.
Q2) Refer to Instruction 13.1. At the end of the year the investor sells his stock that now has an average price per share of 57. What is the investor's average rate of return after converting the stock back into dollars?
A) -1.35%
B) 5.0%
C) -5.0%
D) -7.24%
Q3) An internationally diversified portfolio:
A) should result in a portfolio with a lower beta than a purely domestic portfolio.
B) has the same overall risk shape as a purely domestic portfolio.
C) is only about 12% as risky as the typical individual stock.
D) all of the above
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15
Chapter 14: Funding the Multinational Firm
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Sample Questions
Q1) The initial issuance of shares by a company in an IPO typically represents no more than:
A) 25%.
B) 35%.
C) 45%.
D) 55%.
Q2) Which of the following were NOT identified by the authors as a variable that needs to be modified in the domestic theory of optimal financial structures to accommodate the case of the multinational enterprise?
A) financial distress
B) availability of capital
C) diversification of cash flows
D) foreign exchange risk
Q3) Private equity funds (PEF) differ from traditional venture capital (VC) funds in that:
A) VC operates mainly in lesser-developed countries while PEF do not.
B) VC typically invests in family business whereas PEF do not.
C) VC is almost unavailable to emerging markets while PEF capital is available.
D) All of the above are true.
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16
Chapter 15: Multinational Tax Management
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Sample Questions
Q1) As part of the Act of 2017, the taxation of Foreign-Source Income will not create tax credits or deficits when declared as dividends to the U.S. parent.
A)True
B)False
Q2) What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose this form of taxation has NOT been widely accepted in the United States?
Q3) Refer to Table 15.1. If BayArea pays out 50% of its earnings from each subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea respectively?
A) Ukraine = $0; Korea = ($30,000)
B) Ukraine = $100,000; Korea = $0
C) Ukraine = $0; Korea = $66,250
D) none of the above
Q4) Tax analysts and authorities believe that in the years ahead most of the world will move towards increased use of direct taxes - income taxes.
A)True
B)False
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Chapter 16: International Trade Finance
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Sample Questions
Q1) The ________ is the instrument normally used to actually effect payment in international commerce.
A) banker's acceptance
B) bill of exchange
C) bill of lading
D) letter of credit
Q2) The person or company initiating the draft or bill of exchange is known as the: A) maker.
B) drawer.
C) originator.
D) any of the above
Q3) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.
A)True
B)False
Q4) Refer to Instruction 16.1. ________ is an unsecured promissory note.
A) A banker's acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper
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Chapter 17: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment agreement?
Q2) A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value.
A)True
B)False
Q3) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.
A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances
Q4) As a general rule, the decision about where to invest abroad for the first time is the same as the decision about where to reinvest abroad.
A)True
B)False
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) The predictability of the project's revenue stream is essential in securing project financing. Which of the following is NOT a typical contract provisions that are intended to assure adequate cash flow?
A) quantity and quality of the project's output
B) a pricing formula
C) circumstances that permit changes in the contract
D) fronting loan
Q2) Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?
A) 14.4%
B) 10.3%
C) 12.0%
D) 8.6%
Q3) Which of the following is NOT a factor critical to the success of project financing?
A) separability of the project from its investors
B) long-lived and capital intensive singular projects
C) cash flow predictability from third part commitments
D) All of the above are critical factors for project financing.
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Page 20