International Economics
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Course Introduction
International Economics explores the fundamental principles and real-world dynamics of economic interactions among countries, focusing on topics such as international trade theory, trade policy, balance of payments, exchange rates, and the impact of globalization on national economies. Students examine models that explain the flow of goods, services, and capital across borders, as well as the role of international institutions and economic agreements. The course also addresses current issues such as trade disputes, economic development, and the effects of emerging markets on the global economy, equipping students with analytical tools to understand and evaluate international economic policies and trends.
Recommended Textbook
Fundamentals of Multinational Finance 3rd Edition by Michael H. Moffett
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Page 2
Chapter 1: Globalization and the Multinational Enterprise
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Sample Questions
Q1) Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs.
A)True
B)False
Answer: False
Q2) Which of the following is NOT considered to be a type of competitive advantage that may be enjoyed by an MNE?
A) competitiveness in their home markets
B) foreign exchange risks
C) economies of scale
D) economies of scope
Answer: B
Q3) Typically, a firm in its domestic stage of globalization has all financial transactions in its domestic currency.
A)True
B)False
Answer: True
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Chapter 2: Financial Goals and Corporate Governance
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Q1) The Shareholder Wealth Maximization Model
A) combines the interests and inputs of shareholders, creditors, management, employees, and society.
B) is being usurped by the Corporate Wealth Maximization Model as those types of MNEs dominate their global industry segments.
C) clearly places shareholders as the primary stakeholder.
D) is the dominant form of corporate management in the European-Japanese governance system.
Answer: C
Q2) Which of the following is an operational process that can destroy firm value?
A) interest rate fluctuations
B) competitive pressures
C) natural disasters
D) accounting irregularities
Answer: D
Q3) Non-Anglo-American markets are dominated by the "one-vote-one-share" rule. A)True
B)False
Answer: False
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Page 4
Chapter 3: The International Monetary System
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Sample Questions
Q1) Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
A)True
B)False
Answer: False
Q2) Under a fixed exchange rate regime, the government of the country is officially responsible for
A) intervention in the foreign exchange markets using gold and reserves.
B) setting the fixed/parity exchange rate.
C) maintaining the fixed/parity exchange rate.
D) all of the above.
Answer: D
Q3) World War I caused the suspension of the gold standard for fixed international exchange rates because the war
A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.
Answer: B
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Chapter 4: The Balance of Payments
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Sample Questions
Q1) The ________ of the balance of payments measures all international economic transactions of financial assets.
A) current account
B) merchandise trade account
C) services account
D) capital/financial account
Q2) If your company were to import and export textiles, the transactions would be recorded in the current account subcategory of ________.
A) services trade
B) income trade
C) goods trade
D) current transfers
Q3) In general, the United States goods trade balance has grown increasingly positive over the last 3 years.
A)True
B)False
Q4) In general, as a country's income increases, so does the demand for imports.
A)True
B)False
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit.
A) European terms; indirect
B) American terms; direct
C) American terms; European terms
D) European terms; American terms
Q2) A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit.
A) direct; direct
B) direct; indirect
C) indirect; indirect
D) indirect; direct
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.
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) If according to the law of one price the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is ________.
A) overvalued
B) undervalued
C) correctly valued
D) unknown relative valuation
Q2) Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?
A) 20.0%
B) 15.3%
C) 12.4%
D) 7.2%
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Page 8
Chapter 7: Foreign Exchange Rate Determination and Forecasting
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Q1) The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks.
A)True
B)False
Q2) The authors claim that the theories of international currency values hold better for less liquid and poorly capitalized markets.
A)True
B)False
Q3) The important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories.
A) competing; complementary
B) competing; contemporary
C) complementary; contiguous D) complementary; competing
Q4) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.
Page 9
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Chapter 8: Foreign Currency Derivatives
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Sample Questions
Q1) The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ value.
A) intrinsic value; maximum
B) intrinsic value; minimum
C) time value; maximum
D) time value; minimum
Q2) A call option whose exercise price is less than the spot rate is said to be ________.
A) in-the-money
B) at-the-money
C) out-of-the-money
D) under-the-spot
Q3) ________ volatility are calculated by being backed out of the market option premium values traded.
A) Historic
B) Forward-looking
C) Implied
D) None of the above
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Chapter 9: Transaction Exposure
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Sample Questions
Q1) Currency risk management techniques include forward hedges, money market hedges, and option hedges. Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract. In your diagram, be sure to label the X and Y-axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/£, the price of the option is $0.04 the forward rate is $1.52/£ and the current spot rate is $1.48/£.)
Q2) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.
A) accounting; Operating
B) operating; Transaction
C) transaction; Operating
D) transaction; Accounting
Q3) ________ is a technique used by MNEs to deal with currency exposure.
A) Do nothing
B) Speculation
C) Hedging
D) All are techniques MNEs could use.
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Page 11
Chapter 10: Operating Exposure
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Sample Questions
Q1) Which of the following is NOT an example of diversifying operations?
A) diversifying sales
B) diversifying location of operations
C) raising funds in more than one country
D) sourcing raw materials in more than one country
Q2) An advantage of international diversification is the
A) reduction in the variability of future cash flows due to domestic business cycles.
B) increase in the availability of capital.
C) diversification of political risk.
D) all of the above.
Q3) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as ________.
A) a natural hedge
B) currency-switching
C) matching
D) diversification
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Chapter 11: Translation Exposure
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Sample Questions
Q1) Multinational enterprises always completely hedge translation exposure.
A)True
B)False
Q2) Management can easily offset both translation and transaction exposure through A) a passive hedging strategy.
B) an active hedging strategy.
C) either an active or passive hedging strategy.
D) It is almost impossible to offset both translation and transaction exposure simultaneously.
Q3) It is possible to use different exchange rates for different line items on a financial statement.
A)True
B)False
Q4) The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.
A) current rate; temporal
B) temporal; proper timing
C) current rate; future rate
D) none of the above
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Chapter 12: Global Cost and Availability of Capital
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Sample Questions
Q1) Capital market imperfections leading to financial market segmentation include
A) asymmetric information between domestic and foreign-based investors
B) high securities transaction costs
C) foreign exchange risks
D) All of the above.
Q2) The optimal capital budget
A) occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects.
B) is typically larger for purely domestic firms than for MNEs.
C) is an illusion found only in international finance textbooks.
D) none of the above.
Q3) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation?
A) the market value of equity
B) the market value of debt
C) the risk-free rate of return
D) the marginal tax rate
Q4) What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm?
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Chapter 13: Sourcing Equity Capital Globally
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Sample Questions
Q1) Wallet Drug Company has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 1.0, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What is the firm's new cost of equity after the international issue?
A) 9.15%
B) 11.76%
C) 12.00 %
D) 15.40%
Q2) The term "euro" as used in the euro equity market implies
A) the issuers are located in Europe.
B) the investors are located in Europe.
C) both A and B.
D) none of the above.
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Page 15
Chapter 14: Financial Structure and International Debt
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Sample Questions
Q1) If an MNE needed to obtain, outside of its domestic market, medium-term credit with an established secondary market it would most likely pursue ________.
A) international bank loans
B) syndicated credits
C) some type of euronote
D) the international bond market
Q2) Of the following, which is NOT considered to be an advantage to MNEs of having a financial structure adhere to local debt norms?
A) A localized financial structure reduces criticism of foreign subsidiaries that have previously used a different capital structure.
B) A localized financial structure helps management evaluate return on equity investment relative to local competitors in the same industry.
C) MNE have a competitive advantage over the locals, thus by using the local capital structure, the MNE is even stronger.
D) All of the above are noted as advantages to having a localized capital structure.
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16
Chapter 15: Interest Rate and Currency Swaps
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Sample Questions
Q1) A ________ rate is the rate of interest used in a standardized quotation, loan agreement, or financial derivative valuation.
A) reference rate
B) central rate
C) benchmark rate
D) none of the above
Q2) A basis point is one-tenth of one percent.
A)True
B)False
Q3) Refer to Table 15.1. What is the all-in-cost (i.e., the internal rate of return) of the Polaris loan including the LIBOR rate, fixed spread and upfront fee?
A) 4.00%
B) 5.00%
C) 5.53%
D) 6.09%
Q4) A swap agreement may involve currencies or interest rates, but never both.
A)True
B)False
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Chapter 16: International Portfolio Theory and Diversification
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Sample Questions
Q1) The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier
A) down and to the left.
B) up and to the right.
C) up and to the left.
D) down and to the right.
Q2) The ________ connects the risk-free security with the optimal domestic portfolio.
A) security market line
B) capital asset pricing model
C) capital market line
D) none of the above
Q3) Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of euro 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%
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Chapter 17: Foreign Direct Investment Theory and Strategy
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Sample Questions
Q1) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
Q2) Which of the following is NOT a form of FDI?
A) wholly-owned affiliate
B) joint venture
C) exporting
D) Greenfield investment
Q3) Embraer of Brazil was able to grow internationally by developing a new type of fuselage that allows airlines to acquire an airplane that provides superior comfort to passengers, ease of flying for the pilots, and lower operating costs for the firm. This is an example of ________.
A) leveraging natural resources
B) engineering to innovation
C) exporting a business model
D) acquiring offshore assets
Q4) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.
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Chapter 18: Political Risk Assessment and Management
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Sample Questions
Q1) ________ is the ability to exercise effective control over a foreign subsidiary within a country's legal and political environment.
A) Political risk
B) Portfolio risk
C) Interest rate risk
D) Governance risk
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) ________ is the risk that the investor will not be able to convert profits, royalties, or fees into dollars.
A) Inconvertibility
B) Expropriation
C) Business income risk
D) None of the above
Q4) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
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Chapter 19: Multinational Capital Budgeting
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Sample Questions
Q1) Project finance is characterized by which of the following features?
A) long project life
B) high capital intensity of undertaking the investment
C) production or provision of a basic commodity or service
D) All of the above.
Q2) Cash flows to parents are ultimately the basis for dividends to stockholders, reinvestment elsewhere in the world, repayment of corporate-wide debt, and other proposals that affect the firm's many interest groups. Therefore, analysis of any foreign project should be from the viewpoint of the ________.
A) host country
B) parent
C) project
D) local government
Q3) As in domestic capital budgeting, a potential international project or capital budget will be considered a net benefit to the firms if
A) the project has a net present value greater than zero.
B) the IRR on the project is less than the wacc.
C) the IRR exceed the project's NPV.
D) All of the above are true.
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Page 21
Chapter 20: International Trade Finance
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Sample Questions
Q1) 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.
Q2) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.
A)True
B)False
Q3) A banker's acceptance is a ________ that has been accepted by a bank.
A) credit certificate
B) time draft
C) line of credit
D) bill of lading
Q4) Which are NOT types of letter of credit?
A) insurable vs. noninsurable
B) confirmed vs. unconfirmed
C) revocable vs. irrevocable
D) None are letters of credit.
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Chapter 21: Multinational Tax Management
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Sample Questions
Q1) Some countries assess extremely low corporate income tax rates on foreign source income in order to
A) attract tax haven affiliates of foreign multinationals.
B) boost the value of their domestic currency.
C) support higher taxes of their domestic companies.
D) none of the above.
Q2) Tax treaties typically result in ________ between the two countries in question.
A) lower property taxes for U.S. citizens overseas
B) elimination of differential tax rates
C) increased double taxation
D) reduced withholding tax rates
Q3) Poland has a corporate income tax rate that is higher than that in the United States by the amount of 40% in Poland and 35% in the U.S. This differential mean that a U.S. parent operating with a subsidiary in Poland can realize an
A) excess profit on their Polish investment.
B) excess foreign tax deficit.
C) excess foreign tax credit.
D) none of the above.
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Chapter 22: Working Capital Management
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Sample Questions
Q1) Free-trade zones may take the form of
A) warehouses for imported goods.
B) assembly plants for imported parts.
C) manufacturing plants for re-export.
D) all of the above.
Q2) Other things equal, managers prefer a lower "days working capital" to a higher one.
A)True
B)False
Q3) ________ are compensation for the use of intellectual property belonging to some other party.
A) Royalty fees
B) License fees
C) Remittance fees
D) Repositioning fees
Q4) ________ is NOT an advantage provided to MNEs by a central depository.
A) Obtaining information
B) Holding precautionary cash balances
C) Reducing interest rate costs
D) All are advantages
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