International Economics
Test Bank
Course Introduction
International Economics explores the economic interactions between countries, focusing on the theories and policies governing international trade and finance. The course examines why nations trade, the gains from trade, and the effects of trade policies such as tariffs and quotas. It delves into exchange rate determination, balance of payments, and the impact of globalization on economic growth and development. Students will also analyze contemporary issues such as trade agreements, international institutions, and the economic challenges faced by both developed and developing countries in the global marketplace.
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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Sample Questions
Q1) The Sarbanes-Oxley Act improves corporate governance of MNCs because it:
A) makes executives more accountable for verifying financial statements
B) eliminates stock options as a form of compensation
C) ties executive compensation to firm performance
D) places a limit on the amount of funds that managers can spend
Answer: A
Q2) Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.
A)True
B)False
Answer: True
Q3) The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC.
A)True
B)False
Answer: True
Q4) A decentralized management style of MNC results in relatively high agency costs.
A)True
B)False Answer: True
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) The International Development Association was established to:
A) enhance development solely in Asia through grants.
B) enhance economic development through non-subsidized loans (at market interest rates).
C) enhance economic development through low-interest rate loans (below-market rates).
D) enhance economic development of the private sector through investment in stock of corporations.
Answer: C
Q2) Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.
A)True
B)False
Answer: True
Q3) Intracompany trade represents the exporting of products by one country to other countries below cost.
A)True
B)False
Answer: False
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Page 4
Chapter 3: International Financial Markets
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102 Flashcards
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Sample Questions
Q1) Which of the following is not true regarding electronic communications networks (ECNs)?
A) They have a visible trading floor.
B) Trades are executed by a computer network.
C) They have been created in many countries to match orders between buyers and sellers.
D) They allow investors to place orders on their computers.
E) All of the above are true.
Answer: A
Q2) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:
A) obtain a 90-day forward purchase contract on Canadian dollars.
B) obtain a 90-day forward sale contract on Canadian dollars.
C) purchase Canadian dollars 90 days from now at the spot rate.
D) sell Canadian dollars 90 days from now at the spot rate.
Answer: A
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5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) If U.S. inflation suddenly increased while European inflation stayed the same, there would be:
A) an increased U.S. demand for euros and an increased supply of euros for sale.
B) a decreased U.S. demand for euros and an increased supply of euros for sale.
C) a decreased U.S. demand for euros and a decreased supply of euros for sale.
D) an increased U.S. demand for euros and a decreased supply of euros for sale.
Q2) Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.
A) less; even minor
B) less; only large
C) more; even minor
D) more; only large
E) none of the above
Q3) Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.
A)True
B)False
Q2) 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
Q3) Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.
A) put upward pressure on; put upward pressure on B) put downward pressure on; put upward pressure on C) put upward pressure on; put downward pressure on D) put downward pressure on; put downward pressure on
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) The European Central Bank is located in:
A) London.
B) Denmark.
C) Luxembourg.
D) Frankfurt.
Q2) Which of the following is true regarding the euro?
A) Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
B) It allows for more consistent economic conditions across countries.
C) It prevents each country from conducting its own monetary policy.
D) All of the above are true.
Q3) The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.
A)True
B)False
Q4) A country with fixed exchange rates often faces constraints on growth.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume the following information:
U.S. investors have $1,000,000 to invest: \(\begin{array} { l l r }
1 \text {-year deposit rate affered by U.S. Gariks } & = & 10 \% \\
1 \text {-year deposit rate affered an British pounds } & = & 13.5 \% \\
1 \text {-year forward rate of Suriss francs } & = & \$ 1.26 \\ \text { Spot rate of Swriss franc } & = & \$ 1.30 \end{array}\)
Given this information:
A) interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
C) interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
D) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
A) If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.
B) If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.
C) If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen.
D) If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.
Q2) 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
Q3) If purchasing power parity holds, then the Fisher effect must also hold.
A)True
B)False
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Which of the following is not a forecasting technique mentioned in your text?
A) accounting-based forecasting.
B) technical forecasting.
C) fundamental forecasting.
D) market-based forecasting.
Q2) Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.
A) depreciate by .8%; today
B) depreciate by .8%; tomorrow
C) appreciate by .8%; today
D) appreciate by .8%; tomorrow
Q3) A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
A)True
B)False
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Page 11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
A) reduction; reduction
B) increase; increase
C) increase; reduction
D) reduction; increase
Q2) Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.
A)True
B)False
Q3) A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
A)True
B)False
Q4) A reduction in hedging will probably reduce transaction exposure.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
A)True
B)False
Q2) A money market hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
Q3) Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.
A)True
B)False
Q4) If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.
A)True
B)False
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
A)True
B)False
Q2) In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.
A)True
B)False
Q3) Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
A) decreasing foreign revenues; decreasing foreign expenses
B) decreasing foreign revenues; increasing foreign expenses
C) increasing foreign revenues; decreasing foreign revenues
D) decreasing foreign expenses; increasing foreign revenues
Q4) All MNCs are subject to transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) 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
Q2) To use foreign factors of production, an MNC should:
A) establish a subsidiary in a new market that can sell products produced elsewhere.
B) establish a subsidiary in a market that has relatively low costs of labor or land.
C) establish a subsidiary in a market where raw materials are cheap and accessible.
D) participate in a joint venture in order to learn about a production process or other operations.
Q3) Developing countries are mostly targeted because they have advanced technology. A)True B)False
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.
A) should be; should be
B) should definitely not be; should definitely not be C) should definitely not be; should be D) should be; should definitely not be
Q2) Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
A) the subsidiary finances the entire investment by local borrowing.
B) the subsidiary finances most of the investment by local borrowing.
C) the parent finances most of the investment.
D) the parent finances the entire investment.
Q3) The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.
A)True
B)False
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Page 16
Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) The valuation of a target (from the parent's perspective) should increase when the potential acquirer's cost of capital increases.
A)True
B)False
Q2) Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is $____ million.
A) 155.9
B) 111.5
C) 138.0
D) 143.0
E) none of the above
Q3) The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly after a bid by the acquiring firm.
A)True
B)False
Q4) Downsizing reduces expenses but may also reduce productivity and revenue. A)True
B)False
17
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) A mild form of political risk is a tendency of residents to purchase only:
A) imported products.
B) locally produced products.
C) products produced by MNCs.
D) none of the above
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) Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.
A)True
B)False
Q4) While an overall risk rating of a country can be useful, it cannot always detect upcoming crises.
A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.
A)True
B)False
Q2) An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.
A)True
B)False
Q3) Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.
A) higher; MNCs
B) lower; domestic firms
C) lower; MNCs
D) none of the above
Q4) The MNC's cost of equity is unrelated to the local risk-free rate.
A)True
B)False
Page 19
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) Fixed-rate loans have interest rates that are fixed for each year but adjust at the end of each year in response to prevailing interest rates.
A)True
B)False
Q2) Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
Q3) A(n) ____ swap is entered into today, but the swap payments start at a specific future point in time.
A) accretion
B) amortizing
C) forward
D) zero-coupon
E) putable
Q4) A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) A ____ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.
A) draft
B) bill of lading
C) trade acceptance
D) letter of credit
Q2) The ____ was established in 1934 with the intention to facilitate Soviet-American trade.
A) Domestic International Sales Corporation (DISC)
B) Private Export Funding Corporation (PEFCO)
C) Export-Import Bank
D) Foreign Credit Insurance Association (FCIA)
Q3) Under a letter of credit, the exporter will not ship the goods until the buyer has remitted payment to the exporter.
A)True
B)False
Q4) There is an active secondary market for banker's acceptances.
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, transactions costs are zero, and the forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency:
A) would be equal to the U.S. interest rate.
B) would be less than the U.S. interest rate.
C) would be more than the U.S. financing rate.
D) would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.
Q2) The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.
A) lower; low
B) lower; high
C) higher; high
D) higher; low
Q3) The interest rate of euronotes is based on the T-bill rate.
A)True
B)False
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Page 22
Chapter 21: International Cash Management
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Sample Questions
Q1) In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.
A)True
B)False
Q2) An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.
A)True
B)False
Q3) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True
B)False
Q4) Which of the following is true?
A) Some countries may prohibit netting.
B) Some countries may prohibit forms of leading and lagging.
C) A and B
D) None of the above
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Page 23