International Economics
Exam Questions
Course Introduction
International Economics explores the economic interactions among nations, focusing on the theories and policies governing international trade, investment, and finance. The course examines the causes and consequences of trade between countries, the effects of trade policies such as tariffs and quotas, the dynamics of exchange rates and currency markets, and the functioning of international organizations like the World Trade Organization and the International Monetary Fund. Through real-world case studies and policy analysis, students develop an understanding of globalization, comparative advantage, balance of payments, and the impacts of international economic integration on growth, development, and inequality.
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) If the total world production of potatoes is 2000 tons,how much tomatoes will be produced in Russia?
A) 1000 tons
B) 500 tons
C) 666.67 tons
D) 333.33 tons
Answer: D
Q2) If people in both countries eat the same dish that requires 0.1 kg of tomatoes and 1.4 kg of potatoes to prepare,how much potatoes will be produced in the Republic of Belarus?
A) None
B) 333.33 tons
C) 500 tons
D) 666.67 tons
Answer: C
Q3) What is Political risk?
Answer: Political risk is the risk associated with the ability of a sovereign nation to change the "rules of the game".Such risk ranges from unexpected changes in tax rules to outright expropriation of assets held by foreigners.
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Page 3
Chapter 2: International Monetary System
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Q1) Which of the following is NOT a responsibility of the European System of Central Banks:
A) To define and implement the common monetary policy of the EU
B) To define and implement the common fiscal policy of the EU
C) To conduct foreign exchange operations
D) To hold and manage the official foreign exchange reserves of the euro member states
Answer: B
Q2) It is said that the gold-exchange system was programmed to collapse in the long run.To satisfy the growing need for reserves,the United States had to run balance-of-payments deficits continuously.Yet,if the United States ran perennial balance-of-payments deficits,it would eventually impair the public confidence in the dollar.This dilemma was known as the
A) Triffin paradox
B) Triffin dilemma
C) Mundell paradox
D) Mundell dilemma
Answer: A
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Chapter 3: Balance of Payments
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Sample Questions
Q1) Foreign direct investment (FDI)occurs:
A) when an investor acquires a measure of control of a foreign business
B) when an investor buys foreign bonds directly
C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control
D) when a company buys foreign government bonds directly
Answer: A
Q2) Explain balance on capital account.
Answer: The capital account records the flow of capital,in the form of foreign direct investment or portfolio investment,in and out of Canada.Inflows of capital are recorded as credits,since they give rise to the demand of the Canadian dollar.Outflows of capital are recorded as debits,since they give rise to the supply of the Canadian dollar.The balance on capital account tells us whether there was an excess demand for Canadian dollars (the balance on capital account is positive)or an excess supply of Canadian dollars (the balance on capital account is negative)resulting from the flow of capital.
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Chapter 4: The Market for Foreign Exchange
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Sample Questions
Q1) Given the following information:
Bank A: \(\quad\) SF \(1.5 / \$\)
Bank B: \(\quad \$ 1.6 /\) pound
Bank C: \(\quad\) pound 0.45/SF a)What kind of arbitrage is possible?
b)If you have SF100,000 for the arbitrage,what arbitrage profit can be made?
c)At what exchange rate at the Credit Suisse would there be no arbitrage (assume that the other two exchange rates don't change)?
Q2) If CIBC posts 1.10 CA$/US$ - 1.14 CA$/US$ bid-ask exchange rates,Scotiabank posts 1.12 CA$/US$ - 1.15 CA$/US$,and Bank of America posts 0.88 US$/CA$ - 0.9 US$/CA$ exchange rates,what is the maximum amount of CA$ can you get for 1 US$?
A) 1.100
B) 1.111
C) 1.120
D) 1.136
Q3) On average,worldwide daily trading of foreign exchange is:
A) $15.95 billion
B) impossible to estimate
C) $362 billion
D) $3.73 trillion
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Page 6
Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) 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.
Q2) Purchasing Power Parity (PPP)theory states that:
A) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.
B) as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will appreciate against stable currencies.
C) the prices of standard commodity baskets in two countries are not related.
D) the exchange rate between currencies of two countries will not be equal to the ratio of the countries' price levels.
Q3) When Interest Rate Parity (IRP)does not hold:
A) there is a high degree of inflation.
B) the financial markets are in equilibrium.
C) there are opportunities for covered interest arbitrage.
D) there are no opportunities for arbitrage.
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Chapter 6: International Banking and Money Market
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Q1) Short-term unsecured promissory notes issued by a corporation or a bank and placed directly with the investment public through a dealer are called
A) eurocredits
B) eurocommercial papers
C) euro facilities
D) euronotes
Q2) A loss that will be exceeded with a specific probability over a specified time horizon is called:
A) Capital reserves
B) Systematic risk
C) Value at risk
D) Money-market risk
Q3) The amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure is know as:
A) Value-at-risk
B) Bank capital adequacy
C) Negotiable certificate of deposit
D) Eurocurrency reserve
Q4) Explain Eurocommerical papers.
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Chapter 7: International Bond Market
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Sample Questions
Q1) ABC Corporation,a Canadian firm,wants to float a bond issue in the United Kingdom.Which choices does the company have?
Discuss the main characteristics of each option.What do you recommend?
Q2) In any given year,what percent of new international bonds are likely to be Eurobonds rather than foreign bonds?
A) 80%
B) 45%
C) 25%
D) 15%
Q3) A "foreign bond" issue is:
A) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency.
B) one offered by a foreign borrower to investors in a national market and denominated in that nation's currency.
C) for example, a German MNC issuing yen-denominated bonds to U.S. investors.
D) one offered by a domestic borrower to investors in a national market and denominated in that nation's currency.
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Chapter 8: International Equity Markets
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Sample Questions
Q1) A firm may cross-list its share to:
A) establish a broader investor base for its stock.
B) establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets.
C) expose the firm's name to a broader investor and consumer groups.
D) All of these.
Q2) The functions of the secondary market are all except:
A) provide liquidity for investors.
B) price determination for traded securities.
C) provide price signals.
D) provide sell signals.
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.
Q4) What factors go into the decision to cross-list on a foreign exchange?
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Chapter 9: Futures and Options on Foreign Exchange
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Q1) Suppose the Canadian Wheat Pool wants to hedge a US dollar payable using futures contracts that trade on the Chicago Mercantile exchange.
A) The Wheat Pool should buy Canadian dollar futures.
B) The Wheat Pool should sell Canadian dollar futures.
C) The Wheat Pool cannot hedge this position.
D) The Wheat Pool should not use the Chicago Mercantile exchange.
Q2) How the value of a European put option for £1 will change if the current exchange rate will instantly increase from $1.4/£ to $1.5/£?
A) Increase by $0.1.
B) Increase by an amount that cannot be determined based on the available information.
C) Decrease by $0.1.
D) Decrease by an amount that cannot be determined based on the available information.
Q3) Assume that the spot Euro is $1.2000 and the six-months forward rate is $1.2100.Determine the minimum price for which a six-month American put should sell for.The strike price is $1.1900 and the annualized six-month Eurodollar rate is 4%.
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Chapter 10: Interest Rate and Currency Swaps
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Sample Questions
Q1) The following information is given.
\(\begin{array}{lll}
& \text { Fixed Rate } \$(\%) & \text { Floating Rate Euro (\%) } \\
\text { Boeing } & 5.5 \% & \text { LIBOR }+0.25 \% \\
\text { Airbus } & 5.7 \% & \text { LIBOR }+0.05 \%
\end{array}\) Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms.Each firm will save the same amount in percentage terms.
a)Does Boeing prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
b)Does Airbus prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
c)What are the total interest savings available in this interest rate swap?
d)Which company has the advantage in fixed rate debt?
Q2) Which firms will benefit from a currency swap?
A) Neither firm.
B) The Canadian firm only.
C) Both firms.
D) Need more information.
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Page 12
Chapter 11: International Portfolio Investment
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Sample Questions
Q1) Which of the following characterizes international investor behaviour?
A) Investors are fully diversified.
B) Investors hold optimal international portfolios.
C) Investors show a home bias in their portfolio holdings.
D) Investors don't invest in international stocks.
Q2) If the investor had sold US$5,half of the principal investment amount at the same time that the stock was purchased,forward at the forward exchange rate of US$0.64/C$1.00,the dollar rate of return would be: (Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)
A) -13.14%
B) -8.86%
C) -5.00%
D) 8.86%
Q3) Investors can use of the following to diversify their portfolios internationally except:
A) International mutual funds
B) ADRs
C) WEBS
D) STAS
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13
Chapter 12: Management of Economic Exposure
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Q1) Economic exposure refers to:
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.
D) ex post and ex ante currency exposures.
Q2) Which of the following statements is true?
A) Exchange rate exposure on a foreign asset can be eliminated completely via hedging in all cases.
B) Exchange rate exposure on a foreign asset can be eliminated completely via hedging if the value of the foreign asset is fixed.
C) Exchange rate exposure on a foreign asset can be eliminated completely via hedging if the value of the foreign asset is variable.
D) Exchange rate exposure on a foreign asset can never be eliminated completely.
Q3) How can operating exposure be managed?
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Chapter 13: Management of Transaction Exposure
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Sample Questions
Q1) Buying a currency options provides:
A) a flexible hedge against exchange exposure.
B) limits the downside risk while preserving the upside potential.
C) a right, but not an obligation, to buy or sell a currency.
D) all of these.
Q2) Encana Inc,a Canadian firm has a US dollar receivable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is true?
A) If the spot rate is greater than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
B) If the spot rate is less than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
C) If the spot rate is equal to the forward rate at maturity, Encana is better off with the hedge than without the hedge.
D) Need more information
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15
Chapter 14: Management of Translation Exposure
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Sample Questions
Q1) The French subsidiary of a Canadian parent has the following balance sheet (in euros):
\[\begin{array} { l r l r }
\text { Cash } & \text { EUR 200,000 } & \begin{array} { l }
\text { Current } \\
\text { liabilities }
\end{array} & \text { EUR400,000 } \\
\text { Receivables } & 300,000 & \text { Long-term debt } & 100,000 \\
\text { Inventory } & 400,000 & & \\
\text { Net plant \& } & \underline { 500,000 } & \text { Owner's equity } & \underline { 900,000 } \\
\text { equipment } & \text { EUR1,400,000 } && \text { EUR1,400,000 }
\end{array}\] The euro increases in value from EUR 1.6/C$ to EUR 1.3/C$.Using the current rate method,what happened to the total value of assets?
Q2) Which translation method is used in Canada?
A) Current rate method only.
B) Temporal approach only.
C) Both current rate method and temporal approach.
D) None of these.
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Page 16
Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions
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Sample Questions
Q1) How can Export Development Canada (EDC)help firms to deal with political risk?
Q2) Synergistic gains refer to:
A) gains from hedging.
B) gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firms.
C) gains arising if the companies can save on the costs of production, marketing, distribution, and R&D standalone.
D) gains obtained when the companies face together into a competition for a particular product market.
Q3) Explain political risk and its three main classifications.How can political risk be incorporated in the decision making process when firms decide on whether to invest in foreign project or not?
Q4) What percentage of FDI originated in developed countries during the past decade?
A) 60%
B) 80%
C) 90%
D) 95%
Q5) Explain the role of market imperfections in FDI.
Page 17
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Chapter 16: International Capital Structure and the Cost of Capital
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Q1) Assume that A-Plus Corporation is a leveraged company with a marginal income tax rate of 30%,an average income tax rate of 25%,and before tax-cost of borrowing of 5%.The firm's domestic beta is 1.4 and its world market beta is 0.8.The domestic market return is 12% and the world market return is 14%.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 integrated.
Q2) Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%. (Do not round intermediate calculations and round your final answer to nearest whole percent)
A) 28%
B) 38%
C) 46%
D) 50%
Q3) "When in Rome,do as the Romans do." best describes which approach to a subsidiary's financial structure?
A) Conform to the parent company's norm.
B) Conform to the local norm of the country where the subsidiary operates.
C) Vary judiciously
D) Vary randomly
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Chapter 17: International Capital Budgeting
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Q1) The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to:
A) distinguish between the market value of a levered firm and the market value of an unlevered firm.
B) discern the blocking of certain cash flows by the host country from being legally remitted to the parent.
C) consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances.
D) All of these.
Q2) The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:
A) C$1.3176/euro.
B) C$1.5692/euro.
C) C$1.6000/euro.
D) C$1.6923/euro.
Q3) Which cash flows are relevant for the international capital budgeting analysis?
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Page 19
Chapter 18: Multinational Cash Management
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Q1) If inter-affiliate cash flows are uncorrelated with one another,what is the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members:
Q2) Soleil Inc.has an affiliate in France and one in Singapore.The entire production of the French affiliate is sold to the affiliate in Singapore which sells the final product to customers.The Singaporean affiliate has sales of 300 and overhead costs of 20.The cost of goods sold in France is 150.The income tax rates are 40 percent in France and 20 percent in Singapore.Assume that neither Singapore nor France put any restrictions on the transfer price.What is the optimal transfer price? What are the total taxes paid?
Q3) Which of the following helps to reduce the optimal size of the precautionary cash balances?
A) Transfer pricing.
B) Centralized cash depositary.
C) Differential income tax rates.
D) None of these.
Q4) Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?
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Page 20
Chapter 19: Exports and Imports
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Q1) The term "countertrade" refers to:
A) many different types of transactions in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer.
B) barter, clearing arrangement, and switch trading.
C) buy-back, counter purchase, and offset.
D) All of these.
Q2) The three basic documents needed in a foreign trade transaction are:
A) letter of credit, time draft, and proof of inspection.
B) letter of credit, time draft, and a bill of lading.
C) letter of credit, bill of lading, and insurance.
D) time draft, bill of lading, and a pro forma statement.
Q3) The time from acceptance to maturity on a banker's acceptance (B/A)is 90 days,the importing bank's acceptance commission is 1 percent and the B/A's discounted value at the time of acceptance is $1,000,000.What is the 90-day B/A rate if the value at maturity is $1,034,000?
Q4) Name and explain the three most important documents in a typical international trade transaction.
Q5) Explain the major differences between international and domestic trade.
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Chapter 20: International Tax Environment
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Q1) A foreign branch is:
A) an extension of the parent and is not an independently incorporated firm separate from the parent.
B) an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C) either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation.
D) None of these.
Q2) 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.
Q3) To tax all income earned within the country by any taxpayer is called:
A) worldwide or residential taxation.
B) worldwide or source taxation.
C) territorial or residential taxation.
D) territorial or source taxation.
Q4) What are the major ways in which countries levy taxes?
Page 22
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Chapter 21: Corporate Governance Around the World
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Q1) Explain the agency problem and how it can be remedied.
Q2) English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because:
A) the former countries tend to be more democratic than the latter.
B) the former countries tend to protect property rights better than the latter.
C) the former countries tend to have more separation of power than the latter.
D) All of these.
Q3) 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.
Q4) Commercial legal systems of most countries are derived from four legal origins.Which of the following is not one of them?
A) English Common law.
B) French Common law.
C) German Common law.
D) Italian common law.
Q5) How can listing overseas benefit the corporate governance of a public company?
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