International Economics (with finance emphasis)
Test Bank
Course Introduction
International Economics (with finance emphasis) explores the principles governing economic interactions between countries, with special attention to financial flows, exchange rates, and open economy macroeconomics. This course examines theories of international trade and finance, balance of payments, the determination and dynamics of exchange rates, and the impact of international financial markets on economic policy. Students analyze the role of institutions such as the International Monetary Fund and World Bank, study current international economic issues, assess the effects of monetary and fiscal policy in an open economy, and evaluate the influence of globalization on financial stability and development.
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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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
A)True
B)False
Answer: False
Q2) A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.
A)True
B)False
Answer: False
Q3) Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.
A)True
B)False
Answer: True
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time. A) increased; increased B) increased; decreased C) decreased; decreased D) decreased; increased
Answer: B
Q2) U.S. government officials would likely prefer that China devalue the yuan against the dollar.
A)True
B)False
Answer: False
Q3) The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries.
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) The bid/ask spread for small retail transactions is commonly in the range of ____ percent.
A) 3 to 7
B) .01 to .03
C) 10 to 15
D) .5 to 1
Answer: A
Q2) Certificates representing bundles of stock of non-U.S. firms are called:
A) Eurobonds
B) ADRs
C) FRNs
D) Eurobor
Answer: B
Q3) If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.
A)True
B)False
Q2) The phrase "the dollar was mixed in trading" means that:
A) the dollar was strong in some periods and weak in other periods over the last month.
B) the volume of trading was very high in some periods and low in other periods.
C) the dollar was involved in some currency transactions, but not others.
D) the dollar strengthened against some currencies and weakened against others.
Q3) The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less.
A)True
B)False
Q4) Liquidity of a currency can affect the extent to which speculation can impact the currency's value.
A)True
B)False
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6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
A)True
B)False
Q2) The purchase of a currency put option would be appropriate for which of the following?
A) Investors who expect to buy a foreign bond in one month.
B) Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C) Corporations who expect to collect on a foreign account receivable in one month.
D) all of the above
Q3) If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) A "dirty" float represents a system of:
A) freely floating exchange rates.
B) fixed exchange rates.
C) floating exchange rates, but the central bank can manipulate the currency.
D) fixed exchange rates, but the central bank can manipulate the currency.
Q2) The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:
A) pegged system.
B) fixed system.
C) managed float system.
D) crawling peg system.
Q3) The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.
A) more; more
B) more; less
C) less; less
D) less; more
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8
Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.
A)True
B)False
Q2) Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage
Q3) Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.
A)True
B)False
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.
A) 3.43%
B) 5.68%
C) 6.5%
D) 7.3%
Q2) The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
A)True
B)False
Q3) Because there are a variety of factors in addition to inflation that affect exchange rates, 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
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) A fundamental forecast that uses multiple values of the influential factors is an example of:
A) sensitivity analysis.
B) discriminant analysis.
C) technical analysis.
D) factor analysis.
Q2) If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.
A) higher; buy; upward
B) higher; sell; downward
C) higher; sell; upward
D) lower; buy; upward
Q3) Which of the following is not a limitation of fundamental forecasting?
A) uncertain timing of impact.
B) forecasts are needed for factors that have a lagged impact.
C) omission of other relevant factors from the model.
D) possible change in sensitivity of the forecasted variable to each factor over time.
E) none of the above
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
A) Transaction
B) Economic
C) Translation
D) None of the above
Q2) ____ is (are) not a determinant of translation exposure.
A) The MNC's degree of foreign involvement
B) The locations of foreign subsidiaries
C) The local (domestic) earnings of the MNC
D) The accounting methods used
Q3) The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.
A)True
B)False
Q4) The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods.
A)True
B)False
Q2) Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.
A)True
B)False
Q3) A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.
A) forward; small
B) futures; large
C) forward; large
D) none of the above
Q4) MNCs generally do not need to hedge because shareholders can hedge their own risk.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.
A)True
B)False
Q2) If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:
A) cash inflows exceed cash outflows in each foreign currency.
B) cash outflows exceed cash inflows in each foreign currency.
C) cash inflows match cash outflows in each foreign currency.
D) none of the above
Q3) ____ is (are) a limitation of hedging translation exposure.
A) Inaccurate earnings forecasts
B) Inadequate forward contracts for some currencies
C) Accounting distortions
D) Increased transaction exposure
E) All of the above
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Page 14
Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.
A) Paraguay
B) Morocco
C) Sweden
D) China
Q2) 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
Q3) The ____ the correlation in project returns is over time, the ____ will be the project portfolio risk as measured by the portfolio variance.
A) lower; lower
B) higher; lower
C) lower; higher
D) none of the above
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.
A)True
B)False
Q2) Exchange rates for purposes of multinational capital budgeting:
A) are very difficult to forecast.
B) can be easily hedged with currency swaps.
C) are unimportant, as they do not affect the cash flows of the multinational project.
D) all of the above
Q3) An international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Q4) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.
A)True B)False
Q2) The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
A)True
B)False
Q3) Which of the following is not true regarding a target's previous cash flows?
A) They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.
B) It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
C) They are always good indicators of future cash flows.
D) All of the above are true.
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host government.
A)True
B)False
Q2) Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC's product.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
Q3) Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis?
A) Adjusting the discount rate upward
B) Adjusting the input variables to estimate the sensitivity of the project's NPV
C) Adjusting the political risk rating to obtain a more favorable NPV
D) Country risk should be ignored in capital budgeting, since it is a subjective analysis.
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Which of the following is least likely to influence an MNC's capital structure?
A) The stability of MNC's cash flows
B) The MNC's credit risk
C) The MNC's access to earnings
D) The MNC's decision to invest excess cash in a Treasury bill rather than in a bank
Q2) The capital asset pricing theory is based on the premise that:
A) only unsystematic variability in cash flows is relevant.
B) only systematic variability in cash flows is relevant.
C) both systematic and unsystematic variability in cash flows are relevant.
D) neither systematic nor unsystematic variability in cash flows is relevant.
Q3) In general, a firm ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.
A) more; narrower
B) less; wider
C) more; wider
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) ____ are commonly used to hedge interest rate risk.
A) Currency swaps
B) Parallel loans
C) Interest rate swaps
D) Forward contracts
E) None of the above
Q2) A floating coupon rate is an advantage to the bond issuer during periods of increasing interest rates.
A)True
B)False
Q3) A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
A) invoicing its exports in U.S. dollars.
B) requesting that any imports ordered by the firm be invoiced in U.S. dollars.
C) invoicing its exports in euros.
D) requesting that any imports ordered by the firm be invoiced in the currency denominating the bonds.
Q4) Many MNCs simultaneously swap interest payments and currencies.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) With ____, a bank purchases a receivable without recourse to the exporter.
A) accounts receivable financing
B) factoring
C) a banker's acceptance
D) a letter of credit
Q2) ____ is not a type of program offered by Ex-Imbank.
A) Guarantees
B) Loans
C) Currency swap insurance
D) Bank insurance
Q3) Which of the following is not true regarding a banker's acceptance?
A) It can be beneficial to the exporter, as he does not have to worry about the credit risk of the importer.
B) It can be beneficial to the importer, as he may have greater access to foreign markets when purchasing supplies.
C) It can be beneficial to the bank accepting the draft in that it earns a commission for creating an acceptance.
D) It is a sight draft.
E) All of the above are true.
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?
A)10%.
B)-10%.
C)-1%.
D)1%.
E)none of the above
Q2) Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?
A)about -1.7%.
B)about 0.0%.
C)about 14.7%.
D)about 15.4%.
E)about 8.3%.
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) A common purpose of inter-subsidiary leading or lagging strategies is to:
A) allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds.
B) assure that the inventory levels at subsidiaries are maintained within tolerable ranges.
C) change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary.
D) measure the performance of subsidiaries according to how quickly subsidiaries remit dividend payments to the parent.
Q2) Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by Moore Corporation?
A) .624%.
B) 7.950%.
C) 1.040%.
D) 10.200%.
E) none of the above
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