International Economics Exam Review
Course Introduction
International Economics explores the principles and theories governing economic transactions between countries, including trade, finance, and investment flows. The course examines topics such as comparative advantage, trade policy, exchange rates, balance of payments, and the impact of globalization on markets and economies. Through real-world case studies and quantitative analysis, students develop an understanding of how international economic policies shape global development, affect domestic economies, and influence the strategies of businesses and governments in an interconnected world.
Recommended Textbook
Multinational Business Finance 13th Edition by David K. Eiteman
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Chapter 1: Current Multinational Challenges and the Global Economy
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Q1) Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet.
A)True
B)False
Answer: True
Q2) A well-established, large U.S.-based MNE will probably NOT be able to overcome which of the following obstacles to maximizing firm value?
A)an open market place
B)high quality strategic management
C)access to capital
D)none of the above
Answer: D
Q3) The key factor attracting both depositors and borrowers to the Eurocurrency loan market is the narrow interest rate spread within that market.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Corporate Ownership, Goals, and Governance
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Q1) Which of the following is NOT an important concept when distinguishing between international and domestic financial management?
A)corporate governance
B)culture, history, and institutions
C)political risk
D)All of the above are important distinguishing concepts.
Answer: D
Q2) The stakeholder capitalism model does not assume that equity markets are either efficient or inefficient.
A)True
B)False
Answer: True
Q3) What are the most important distinctions that make state owned enterprises (SOEs)different from other forms of government organizations?
Answer: State owned enterprises are created distinctly for the purpose of commercial activities, rather than the multitude of other social, civil, and regulatory activities of government. SOEs are today, in many countries, the dominant form of business entity.
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Chapter 3: The International Monetary System
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Q1) The Euro currency is fixed against other currencies on the international currency exchange markets, but allows member country currencies to float against each other.
A)True
B)False
Answer: False
Q2) Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).
A)True
B)False
Answer: False
Q3) Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, currencies that are predominantly market-driven are considered to be:
A)soft pegs.
B)hard pegs.
C)floating arrangements.
D)a residual agreement.
Answer: C
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Chapter 4: The Balance of Payments
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Q1) An American tourist purchases a leather jacket while in Italy. Which of the following statements is true?
A)The leather purchase would be considered an import for the U.S. BOP.
B)This transaction would be properly accounted for in the Current Account of the U.S. BOP.
C)The leather purchase is considered an import of a good, and thus, considered part of the balance of trade as well.
D)All of these statements are true.
Q2) The biggest problem that China faces in maintaining a stable value for their currency, the yuan, is their lack of foreign exchange reserves.
A)True
B)False
Q3) In 2010 the United States posted a current account deficit of -$471 billion. The bulk of the negative value came from:
A)a net transfer deficit.
B)an income balance deficit.
C)a goods trade deficit.
D)an income trade deficit.
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Chapter 5: The Continuing Global Financial Crisis
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Q1) Debt issued by the national government is called:
A)debenture debt.
B)municipal debt.
C)sovereign debt.
D)none of the above
Q2) The members of the EU's eurozone (euro participants)do NOT have the ability to conduct independent monetary policy.
A)True
B)False
Q3) From 1990 through 2007, the amount of securitized loans outstanding dropped from over $25 trillion to less than $5 trillion and was a key element in the loss of market liquidity.
A)True
B)False
Q4) What is TARP? Provide an argument for why TARP was necessary and successful.
Q5) What is a Collateralized Debt Obligation (CDO)? In your answer explain how CDOs are generally separated into one of three tranches. What types of mistakes were made by security rating agencies that contributed to the collapse of the CDO market?
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Chapter 6: The Foreign Exchange Theory and Markets
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Q1) The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.
A)futures market
B)federal open market
C)foreign exchange market
D)LIBOR
Q2) A ________ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
A)spot
B)forward-forward
C)swap
D)futures
Q3) Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.
A)True
B)False
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8
Chapter 7: International Parity Conditions
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Q1) The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.
A)True
B)False
Q2) Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.
A)conflicting; not efficient
B)conflicting; efficient
C)consistent; inefficient
D)none of the above
Q3) The authors state that empirical tests of purchasing power parity "have, for the most part, not proved PPP to be accurate in predicting future exchange rates." The authors then state that PPP does hold up reasonably well in two situations. What are some reasons why PPP does not accurately predict future exchange rates, and under what conditions might we reasonably expect PPP to hold?
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9
Chapter 8: Foreign Currency Derivatives and Swaps
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Q1) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?
A)Sell a pound currency futures contract.
B)Buy a pound currency futures contract.
C)Sell pounds today.
D)Sell pounds in six months.
Q2) A basis point is one-tenth of one percent.
A)True
B)False
Q3) A call option whose exercise price is less than the spot price is said to be:
A)in-the-money.
B)at-the-money.
C)out-of-the-money.
D)under-the-spot.
Q4) Swap rates are derived from the yield curves in each major currency.
A)True
B)False
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Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Q1) A major U.S. multinational firm has forecast the euro/dollar rate to be 1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£)in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year?
A) 1.40/£
B)£1.40/
C)£1.54/
D) 1.54/£
Q2) The ________ is the Argentine currency unit.
A)peso
B)dollar
C)real
D)peseta
Q3) Which of the following was NOT an international currency crisis in the 1990s and early 2000s?
A)the Asian Crisis
B)the Canadian Crisis
C)the Argentine Crisis
D)All of the above were currency crises in the 1990s and 2000s.
Page 11
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Chapter 10: Transaction Exposure
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Q1) Which of the following is cited as a good reason for NOT hedging currency exposures?
A)Shareholders are more capable of diversifying risk than management.
B)Currency risk management through hedging does not increase expected cash flows.
C)Hedging activities are often of greater benefit to management than to shareholders.
D)All of the above are cited as reasons NOT to hedge.
Q2) Refer to Instruction 10.2. The cost of a put option to CVT would be:
A)$52,500.
B)$55,388.
C)$58,275.
D)There is not enough information to answer this question.
Q3) ________ are transactions for which there are, at present, no contracts or agreements between parties.
A)Backlog exposure
B)Quotation exposure
C)Anticipated exposure
D)none of the above
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12
Chapter 11: Translation Exposure
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Q1) If the European subsidiary of a U.S. firm has net exposed assets of 750,000, and the euro drops in value from $1.30/euro to $1.20/ the U.S. firm has a translation:
A)gain of $75,000.
B)loss of $75,000.
C)gain of $625,000.
D)loss of 576,923.
Q2) If management expects a foreign currency to depreciate, it could minimize translation exposure by increasing net exposed assets.
A)True
B)False
Q3) Under U.S. accounting and translation practices, use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."
A)True
B)False
Q4) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
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13
Chapter 12: Operating Exposure
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Sample Questions
Q1) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.
A)True
B)False
Q2) Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound?
A)Coventry might choose to maintain its domestic sales prices constant in pound terms.
B)Coventry might try to raise domestic prices because competing imports are now priced higher in England.
C)Coventry might try to lower domestic prices because competing imports are now priced higher in England.
D)none of the above
Q3) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is.
A)True
B)False
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14
Chapter 13: The Global Cost and Availability of Capital
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Q1) Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.
A)True
B)False
Q2) Empirical studies indicate that WACC for an MNE is higher than for their domestic competitors. Reasons cited for this increased cost include all of the following EXCEPT:
A)agency costs.
B)foreign exchange risk.
C)political risk.
D)All of the above are cited as reasons for an MNE's increased WACC.
Q3) Capital market imperfections leading to financial market segmentation include:
A)political risks.
B)corporate governance differences.
C)regulatory barriers.
D)all of the above
Q4) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
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15
Chapter 14: Raising Equity and Debt Globally
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Q1) Depositary receipts traded outside the United States are called ________ depositary receipts.
A)Euro
B)Global
C)American
D)none of the above
Q2) For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________.
A)decreases; increases B)decreases; decreases C)increases; increases D)increases; decreases
Q3) Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.
A)point; 50%
B)point; 25%
C)range; 30%-60%
D)range; 10%-40%
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Page 16
Chapter 15: Multinational Tax Management
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Q1) 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
Q2) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
A)True
B)False
Q3) A value-added tax has gained widespread usage in Western Europe, Canada, and parts of Latin America.
A)True
B)False
Q4) Transfer pricing is a strategy that may be used by MNEs to:
A)reduce consolidated corporate income taxes.
B)partially finance a subsidiary in another country.
C)transfer funds from a subsidiary to the parent corporation.
D)all of the above
Page 17
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Chapter 16: International Portfolio Theory and Diversification
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Q1) Capital markets around the world are on average less integrated today than they were 20 years ago.
A)True
B)False
Q2) The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk.
A)standard deviation; variance
B)beta; variance
C)standard deviation; beta
D)beta; standard deviation
Q3) In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002)determined that the equity returns in the United States out-performed the other 15 countries in the study.
A)True
B)False
Q4) International diversification benefits may induce investors to demand foreign securities.
A)True
B)False
18
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Chapter 17: Foreign Direct Investment and Political Risk
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Q1) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.
A)fronting; link financing
B)parallel; a back-to-back loan
C)fronting; a back-to-back loan
D)link financing; parallel loan
Q2) OPIC stands for:
A)Organization for the Prevention of Insufficient Capitalization.
B)Organization of Petroleum Importing Countries.
C)Overseas Private Investment Corporation.
D)Overseas Public Insurance Commission.
Q3) The L in OLI refers to an advantage in a firm's home market that is a:
A)liability in the domestic market.
B)location-specific advantage.
C)longevity in a particular market.
D)none of the above
Q4) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.
A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.
Q2) There are no important differences between domestic and international capital budgeting methods.
A)True
B)False
Q3) Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.
A)local; be subordinated to; parent's
B)local; not be subordinated to; parent's
C)parent's; be subordinated to; local
D)none of the above
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Page 20
Chapter 19: Working Capital Management
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Q1) The constraints on repositioning of funds that occur when exchanging one currency for another are considered to be primarily political constraints.
A)True
B)False
Q2) Days working capital is equal to:
A)days payables + days receivables - days inventory.
B)days inventory + days receivables - days payables.
C)days payables + days inventory + days receivables.
D)none of the above
Q3) Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does not.
A)True
B)False
Q4) Of the following, which would NOT be a significant decision-making factor in a multinational firm's repositioning decision-making?
A)the subsidiary's tax environment (high or low)
B)the stability of the local currency
C)the ability to move capital in and out of the subsidiary's country
D)All of the above are significant factors.
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Chapter 20: International Trade Finance
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Q1) The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following?
A)the risk of noncompletion
B)the risk of foreign exchange risk (when combined with a various hedging techniques)
C)the risk that financing will not be available due to foreign exchange risk
D)All of these risks are reduced when using these trade implements.
Q2) To constitute a true letter of credit transaction, the bank's L/C must contain a specified expiration date or a definite maturity.
A)True
B)False
Q3) Explain what a letter of credit (L/C)is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.
Q4) Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).
A)True
B)False
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