Course Introduction
International Finance
Chapter Exam Questions
International Finance explores the financial dynamics that occur between countries, focusing on topics such as foreign exchange markets, international monetary systems, balance of payments, exchange rate determination, and the management of currency risk. The course examines how global economic events and policies impact financial markets and institutions, providing students with the tools to analyze and make decisions in an international financial environment. Students will also study international investment, multinational capital budgeting, global financing strategies, and the roles of international financial institutions in facilitating cross-border capital flows.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) Which state has a comparative advantage in producing wine in Case II?
A)South Dakota
B)North Dakota
C)Neither state
Answer: A
Q2) Which state has a comparative advantage in wheat production in Case II?
A)South Dakota
B)North Dakota
C)Neither state
Answer: A
Q3) Suppose that trade occurs.Each country completely specializes and 500 kegs of beer are traded for 500 bottles of whiskey.What is the international price of beer?
A)1 bottle of whiskey = 1 keg of beer
B)3 bottles of whiskey = 1 keg of beer
C)2/3 bottle of whiskey = 1 keg of beer
D)1 bottle of whiskey = 3 kegs of beer
Answer: A
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Chapter 2: International Monetary System
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Q1) In the EU,there is a
A)low degree of fiscal integration among EU countries. B)high degree of fiscal integration among EU countries.
Answer: A
Q2) Suppose that Britain pegs the pound to gold at the market price of £6 per ounce,and the United States pegs the dollar to gold at the market price of $36 per ounce.If the official exchange rate between pounds and U.S.dollars is $5 = £1.Which of the following trades is profitable?
A)Start with £100 and trade for $500 at the official exchange rate.Redeem the $500 for 13.89 ounces of gold.Trade the gold for £83.33.
B)Start with $100 and buy gold.Sell the gold for £16.67.Sell the pounds at the official exchange rate.
C)Start with £100 and buy gold.Sell the gold for $600.
D)Start with $500 and trade for £100 at the official exchange rate.Redeem the £100 for 16 2/3 ounces of gold.Trade the gold for $600.
Answer: D
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Chapter 3: Balance of Payments
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Q1) Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation?
A)The current account
B)The capital account
C)The statistical discrepancies
D)The official settlement balance
Answer: D
Q2) Transactions in currency,bank deposits and so forth
A)tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.
B)tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
C)tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.
D)tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.
Answer: B
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Chapter 4: Corporate Governance Around the World
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Q1) Corporate governance structure
A)varies a great deal across countries.
B)has become homogenized following the integration of capital markets.
C)has become homogenized due to cross-listing of shares of many public corporations.
D)none of the above
Q2) One way to measure the value of private benefits of control
A)is to measure the difference in value between non-voting shares and voting shares.
B)is to measure the value of the "block premium" the value difference between the price per share paid for a control block of shares versus the exchange price of regular shares.
C)both a and b
Q3) One of the objectives of corporate governance reform is to,
A)introduce expensive and burdensome accounting reforms.
B)strengthen the protection of outside investors from expropriation by managers and controlling insiders.
C)provide taxpayer financing for corporate raiders to strengthen the discipline of the marketplace.
D)none of the above
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Chapter 5: The Market for Foreign Exchange
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Q1) Spot foreign exchange trading
A)accounts for about 5 percent of all foreign exchange trading.
B)accounts for about 20 percent of all foreign exchange trading.
C)accounts for about 33 percent of all foreign exchange trading.
D)accounts for about 70 percent of all foreign exchange trading.
Q2) Indirect exchange rate quotations from the U.S.perspective are A)the price of one unit of the foreign currency in terms of the U.S.dollar. B)the price of one U.S.dollar in the foreign currency.
Q3) A recent survey of U.S.foreign exchange traders measured traders' perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate.The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment,trade deficits,inflation,GDP,and the Federal funds rate takes place within A)ten seconds.
B)one minute.
C)five minutes. D)one hour.
Q4) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
Q5) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) If you borrowed 1,000,000 for one year,how much money would you owe at maturity?
Q2) The moving average crossover rule
A)is a fundamental approach to forecasting exchange rates.
B)states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is appreciating.
C)states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is depreciating.
D)none of the above
Q3) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
Q4) There is (at least)one profitable arbitrage at these prices.What is it?
Q5) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per that that satisfies IRP from the perspective of a customer who borrowed 1m,traded for dollars at the spot rate and invested at i<sub>$</sub> = 2%.
Q6) There is (at least)one (smallish)profitable arbitrage at these prices.What is it?
Q7) There is (at least)one profitable arbitrage at these prices.What is it?
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Use your results from the last three questions to verify your earlier result for the value of the call.
Q2) State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.
Q3) Which of the following is correct?
A)Time value = intrinsic value + option premium
B)Intrinsic value = option premium + time value
C)Option premium = intrinsic value - time value
D)Option premium = intrinsic value + time value
Q4) The hedge ratio
A)Is the size of the long (short) position the investor must have in the underlying asset per option the investor must write (buy) to have a risk-free offsetting investment that will result in the investor perfectly hedging the option.
B) \(\frac { C _ { u T } - C _ { d T } } { S _ { 0 } ( u - d ) }\)
C)Is related to the number of options that an investor can write without unlimited loss while holding a certain amount of the underlying asset.
D)All of the above
Q5) If the call finishes in-the-money what is your portfolio cash flow?
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Chapter 8: Management of Transaction Exposure
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Q1) Contingent exposure can best be hedged with A)Options.
B)Money market hedging.
C)Futures.
D)All of the above
Q2) With any successful hedge
A)you are guaranteed to lose money on one side.
B)you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C)both a and b
D)none of the above
Q3) Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months),but insists upon paying in pounds instead of dollars.
A)The customer essentially wants you to discount your price by the value of a put option on pounds.
B)The customer essentially wants you to discount your price by the value of a call option on pounds.
C)None of the above
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Chapter 9: Management of Economic Exposure
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Q1) On the basis of regression Equation \(P = a + b \times S + e\) we can decompose the variability of the dollar value of the asset,Var(P),into two separate components
Var(P)= b<sup>2</sup> * Var(S)+ Var(e) The first term in the right-hand side of the equation,b<sup>2</sup> * Var(S)represents
A)the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.
B)captures the residual part of the dollar value variability that is independent of exchange rate movements.
C)none of the above
Q2) A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can
A)lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold.
B)not mitigate the effects of exchange rate changes.
C)lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products without product differentiation.
D)pursue a strategy of increasing its products price elasticity of demand.
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Chapter 10: Management of Translation Exposure
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Q1) Which of the following are true?
A)Some items that are a source of transaction exposure are also a source of translation exposure.
B)Some items that are a source of transaction exposure are NOT also a source of translation exposure.
C)Both a and b
D)None of the above
Q2) Under the monetary/nonmonetary method,revenue and expense items associated with nonmonetary accounts,such as cost of goods sold and depreciation,are translated at the historical rate associated with the balance sheet account.
A)True
B)False
Q3) The "reporting currency" is defined in FASB 52 as
A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)both a and c
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Chapter 11: International Banking and Money Market
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Q1) A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today.The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan.The agreement rate with the seller is 5.0%.Assume that three months from today the settlement rate is 5.25%.Who pays whom? How much? When? The actual number of days in the FRA is 90.
A)The bank pays $3,0084.52 at the end of 3 months
B)The bank pays $3,0084.52 at the end of 6 months
C)The counterparty pays $3,0084.52 at the end of 3 months
D)The counterparty pays $3,0084.52 at the end of 6 months
Q2) A domestic bank that becomes a multinational bank to prevent erosion by foreign banks of the traveler's checks,touring,and foreign business market
A)is playing the role of the desperate housewife in this relationship.
B)is pursuing a wholesale defensive strategy.
C)is pursuing a retail defensive strategy.
D)none of the above
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Chapter 12: International Bond Market
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Q1) Zero coupon bonds
A)pay interest at zero percent.
B)are sold at a discount from par value.
C)are attractive to Japanese investors who are not required to pay taxes on capital gains.
D)both a and b.
Q2) Consider a bond with an equity warrant.The warrant entitles the bondholder to buy 25 shares of the issuer at 50 per share for the lifetime of the bond.The bond is a 30-year zero coupon bond with a 1,000 par value that has a yield to maturity of i<sub> </sub> = 5 percent.The price of the bond is 500.What is the value of the warrant?
A) 231.38
B) 268.62
C) 500
D)none of the above
Q3) Eurobonds are usually
A)bearer bonds.
B)registered bonds.
C)bulldog bonds.
D)foreign currency bonds.
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Chapter 13: International Equity Markets
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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 the above
Q2) American Depository Receipt (ADRs)represent foreign stocks
A)denominated in U.S.dollars that trade on European stock exchanges.
B)denominated in U.S.dollars that trade on a U.S.stock exchange.
C)denominated in a foreign currency that trade on a U.S.stock exchange.
D)non-registered (bearer) securities.
Q3) ADR trades
A)clear in three days, just like trades in U.S.shares.
B)settle only after the trade in the underlying stocks clear, which can take time depending on the clearing practices of the national market.
C)are price in the currency of the underlying security.
D)all of the above
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.
Q2) Explain how firm B could use the forward exchange markets to redenominate a 2-year 40m 5% euro loan into a 2-year USD-denominated loan.
Q3) Floating for floating currency swaps
A)the reference rates are different for the different currencies: e.g.dollar LIBOR versus euro LIBOR.
B)do not exist.
C)offer the swap bank a built-in hedge.
D)none of the above
Q4) An interest-only currency swap has a remaining life of 18 months.It involves exchanging interest at 14% on £20 million for interest at 10% on $14 million once a year.The term structure of interest rates is currently flat in both the U.S.and in the U.K.If the swap were negotiated today the interest rates exchanged would be $8% and £11%.All rates were quoted with annual compounding.The current exchange rate is $1.95 = £1.What is the value of the swap to the party paying dollars?
Q5) Explain how this opportunity affects which swap firm A will be willing to participate in.
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Chapter 15: International Portfolio Investment
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Q1) Hedge fund advisors typically receive a "2-plus-twenty" management fee
A)meaning 2 percent per year of the assets under management, plus performance fee 20 percent of any capital appreciation.
B)meaning 2 percent per year of the assets under management, plus performance fee 20 basis points.
C)meaning 2 percent per year of the assets under management, plus performance fee of 20 percent of the excess return.
D)meaning 2 percent per year of the assets under management, plus performance fee 20 percent of gross return net of the risk-free rate.
Q2) Hedge fund advisors typically receive a management fee,often __________ of the fund asset value as compensation,plus performance fee that can be 20-25 percent of capital appreciation.
A)1 to 2 percent
B)10 to 20 basis points
C)10 percent
D)None of the above
Q3) Find the expected return of a portfolio with half invested in A and half invested in B.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) MNCs might have been lured to invest in China not only by lower labor and material costs but also
A)by China's lower labor and material costs.
B)by the desire to preempt the entry of rivals into China's potentially huge market.
C)by the Kung Pao chicken.
D)by the desire to see, if not buy, all the tea in China.
Q2) Country risk refers to
A)political risk.
B)credit risk, and other economic performances.
C)every risk except political risk.
D)both a and b
Q3) Trade barriers can arise naturally.Which of the following are natural barriers to trade?
A)Transportation costs
B)Quotas
C)Tariffs
D)Transactions costs
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Page 18
Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½,a tax rate of 34%,a levered cost of equity of 12% and an after-tax cost of debt of 8%.
A)9.6%
B)7.968%
C)14%
D)none of the above
Q2) In the notation of the book,K = (1 - \(\lambda\))K<sub>l</sub> + \(\lambda\) (1\(\lambda\))i Which of the following are correct?
A)The debt-to-equity ratio is \(\lambda\)
B)The cost of equity capital for a levered firm is K<sub>l</sub>
C)The after-tax cost of debt capital is i
D)All of the above
Q3) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.
A)
B)½
C)3/5
D)
E)5/7
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Chapter 18: International Capital Budgeting
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Q1) What is the NPV of the project using the WACC methodology?
A)$58,028.68
B)$49,613.03
C)$48,300.47
D)$102,727.55
E)None of the above Using the cash flow menu of a financial calculator: CF0 = -$100,000; C01 = $39,800; F01 = 4; C02 = $43,100; I = rWACC = 11.20; NPV = $48,300.47
Q2) What is CF5 in dollars?
Q3) What is CF1 in dollars?
Q4) What is the levered after-tax incremental cash flow for year 0?
A)-$1,010,000
B)-$1,000,000
C)-$660,000
D)-$2,100,000
E)None of the above
Q5) What is the euro-denominated IRR of this project?
Q6) What is the euro-denominated IRR of this project?
Q7) Find the ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate rises to S<sub>1</sub>( |£)= 2.20 per £.
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Chapter 19: Multinational Cash Management
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Q1) Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A)$250,000
B)$500,000
C)$1,000,000
D)$1,250,000
Q2) Fill out the following figure with the initial situation shown in the table.
Q3) When engaged in bilateral netting
A)total interaffiliate receipts will always equal total interaffiliate disbursements.
B)we can reduce the number of foreign exchange transactions among a MNC with N affiliates to \[\frac { N \times ( N - 1 ) } { 2 }\] or less.
C)each affiliate nets all its interaffiliate receipts against all its disbursements.It then transfers or receives the balance, respectively, if it is a net payer or receiver.
D)all of the above
Q4) Fill out the following figure with the initial situation shown in the table.
Q5) Using your results to the last question,use bilateral netting to simplify.
Q6) Using your results to the last question,use multilateral netting to simplify.
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Page 21
Chapter 20: International Trade Finance
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Q1) Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 180 days.Further assume that the importing bank's acceptance commission is 1.25 percent and that the market rate for 180-day B/As is 5.0 percent.The bond equivalent yield that the bank earns in holding the B/A to maturity is:
A)13.08%
B)6.54%
C)4.06%
D)None of the above
Q2) The ________'s bank sends the letter of credit to the ________'s bank.After sending the merchandise,the ________ gives the shipping documents and time draft to his bank.
A)importer, exporter, exporter
B)exporter, importer, importer
C)importer, exporter, importer
D)exporter, importer, exporter
Q3) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q4) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) If U.S.taxing authorities did not limit the amount of the foreign tax credit to the equivalent amount of the U.S.tax
A)U.S.taxpayers would arguably subsidize part of the tax liabilities of U.S.MNC's foreign earned income.
B)national neutrality would suffer.
C)U.S.MNCs would all depart our shores.
D)all of the above
Q2) A "tax haven" country is one that has a low,or zero percent,national tax rates.Some of the countries that fall into this category are
A)Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B)Denmark, Norway, Switzerland, and Sweden.
C)Bulgaria, Canada, Saudi Arabia, and South Africa.
D)Congo, Egypt, Kuwait, and Zaire.
Q3) The two main objectives of taxation are
A)tax neutrality and tax equity.
B)complexity and revenue.
C)social engineering and tax equity.
D)progressive taxation and tax neutrality.
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