International Finance
Exam Bank
Course Introduction
International Finance explores the financial dynamics that operate across national boundaries, focusing on topics such as foreign exchange markets, international monetary systems, currency risk management, balance of payments, and global capital flows. The course examines the impact of exchange rate fluctuations, international financial instruments, and policies on multinational businesses and economies. Students gain a comprehensive understanding of the risks and opportunities in international investing, financing, and trade, as well as the tools necessary for managing international financial operations in a constantly evolving global environment.
Recommended Textbook
International Financial Management 8th Edition by Cheol Eun
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Page 2
Chapter 1: International Monetary System
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Q1) Willem Duisenberg,the first president of the European Central Bank,defined "price stability" as an annual inflation rate of
A)"no more than five percent."
B)"less than but close to 2 percent."
C)"absolutely no more than zero percent."
D)"no more than three percent."
Answer: B
Q2) Under the Bretton Woods system
A)there was an explicit set of rules about the conduct of international monetary policies.
B)each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary.
C)the U.S.dollar was the only currency that was fully convertible to gold.
D)All the choices are correct.
Answer: D
Q3) 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
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3
Chapter 2: Globalization and the Multinational Firm
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Q1) Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S.dollar,as it did in December 1994.This means that
A)your company's products can be priced out of the Mexican market,as the peso price of American imports will rise following the peso's fall.
B)your firm will be able to charge more in dollar terms while keeping peso prices stable.
C)your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D)none of the options
Answer: A
Q2) The ascendance of the dollar reflects several key factors,such as
A)the size of the U.S.population.
B)the mature and open capital markets of the U.S.economy.
C)exchange rate stability.
D)all of the options
Answer: B
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Chapter 3: Balance of Payments
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Sample Questions
Q1) The current account includes
A)the export and import of goods and services.
B)all purchases and sales of assets such as stocks,bonds,bank accounts,real estate,and businesses.
C)all purchases and sales of international reserve assets such as dollars,foreign exchanges,gold,and special drawing rights (SDRs).
D)none of the options
Answer: A
Q2) Continued U.S.trade deficits coupled with foreigners' desire to diversify their currency holdings away from U.S.dollars
A)could further diminish the position of the dollar as the dominant reserve currency.
B)could affect the value of U.S.dollar (e.g.,through the currency diversification decisions of Asian central banks).
C)could lend steam to the emergence of the euro as a credible reserve currency.
D)all of the options
Answer: D
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Chapter 4: Corporate Governance Around the World
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Q1) The Sarbanes-Oxley Act of 2002
A)has had the consequence that many foreign firms have de-listed in the U.S.exchanges and listed their shares on the London Stock Exchange and other European exchanges.
B)has increased the pace of foreign firms listing their shares in the U.S.
C)has increased the pace of foreign firms listing their shares in the U.S.and has also had the consequence that many foreign firms have de-listed in the U.S.exchanges and listed their shares on the London Stock Exchange and other European exchanges.
D)all of the options
Q2) When company ownership is diffuse,
A)a "free rider" problem encourages shareholder activism.
B)the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group,there's almost always someone who will to incur the costs of monitoring management.
C)most shareholders will have a strong enough incentive to incur the costs of monitoring management.
D)a "free rider" problem discourages shareholder activism and few shareholders have a strong enough incentive to incur the costs of monitoring management.
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Page 6
Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.
A) 192/¥1.00
B) 1.92/¥100
C) 1.25/¥1.00
D) 1.00/¥1.92
Q2) Which of the following are correct?
A) \(F _ { N }\) (j / k)= \(\frac { F _ { N ^ { ( \$ / j ) } } } { F _ { N ^ { ( \$ / k ) } } }\)
B) \(F _ { N }\) (j / k)= \(\frac { F _ { N ^ { ( k / S ) } } } { F _
C) \(F _ { N }\) (j / k)= \(\frac { F _ { N } ( j / \$ ) } { F _ { N } ^ { ( k / \$ ) } }\)
D)all of the options
Q3) A dealer in British pounds who thinks that the pound is about to appreciate
A)may want to widen his bid-ask spread by raising his ask price.
B)may want to lower his bid price.
C)may want to lower his ask price.
D)none of the options
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Chapter 6: International Parity Relationships and Forecasting Foreign
Exchange Rates
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Sample Questions
Q1) Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/ and the forward exchange rate,with one-year maturity,is $1.16/ .Assume that an arbitrager can borrow up to $1,000,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?
A)$10,690
B)$15,000
C)$46,207
D)$21,964.29
Q2) Decision-making for multinational corporations formulating international sourcing,production,financing,and marketing strategies depends,primarily,on A)risk management techniques.
B)expertise of staff attorneys.
C)luck.
D)forecasting exchange rates as accurately as possible.
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8
Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) A binomial call option premium is calculated as
A)C<sub>0</sub> = [qC<sub>uT</sub> + (1 - q)C<sub>dT</sub>] / (1 + r<sub>$</sub>)
B)C<sub>0</sub> = [qC<sub>dT</sub> + (1 - q)C<sub>uT</sub>] / (1 + r<sub>$</sub>)
C)C<sub>0</sub> = [qC<sub>uT</sub> + (1 - q)C<sub>dT</sub>] / (1 - r<sub>$</sub>)
D)C<sub>0</sub> = [qC<sub>dT</sub> + (1 - q)C<sub>uT</sub>] / (1 - r<sub>$</sub>)
Q2) Yesterday,you entered into a futures contract to buy 62,500 at $1.50 per .Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?
A)$1.5160 per .
B)$1.208 per .
C)$1.1920 per .
D)$1.4840 per .
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9
Chapter 8: Management of Transaction Exposure
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Q1) In evaluating the pros and cons of corporate risk management,"market imperfections" refer to
A)information asymmetry,differential transaction costs,default costs,and progressive corporate taxes.
B)leading and lagging,receivables and payables,and diversification costs.
C)economic costs,noneconomic costs,arbitrage costs,and hedging costs.
D)management costs,corporate costs,liquidity costs,and trading costs.
Q2) Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?
A)Buy a call option on £100,000 with a strike price in euro.
B)Buy a put option on £100,000 with a strike price in dollars.
C)Buy a call option on £100,000 with a strike price in dollars.
D)none of the options
Q3) Exchange rate risk of a foreign currency payable is an example of A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options
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Page 10
Chapter 9: Management of Economic Exposure
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Q1) Consider a U.S.MNC with operations in Great Britain.Which of the following are potential risks following a strengthening of the dollar?
A)A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace.
B)A given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation.
C)A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace,and a given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation.
D)none of the options
Q2) The link between the home currency value of a firm's assets and liabilities and exchange rate fluctuations is
A)asset exposure.
B)operating exposure.
C)asset exposure and operating exposure.
D)none of the options
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Chapter 10: Management of Translation Exposure
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Q1) The underlying principle of the current/noncurrent method is A)assets and liabilities should be translated based on their maturity.
B)monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.
C)monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.
D)all balance sheet accounts are translated at the current exchange rate,except for stockholders' equity.A "plug" equity account,named cumulative translation adjustment (CTA),is used to make the balance sheet balance,since translation gains or losses do not go through the income statement according to this method.
Q2) The current/noncurrent method of foreign currency translation was generally accepted in the United States from the 1930s until 1975,when
A)FASB 2 became effective.
B)FASB 4 became effective.
C)FASB 6 became effective.
D)FASB 8 became effective.
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Page 12
Chapter 11: International Banking and Money Market
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Sample Questions
Q1) With regard to creating money,
A)only central banks such as the Federal Reserve can create money.
B)money is created when a bank customer invests in a time deposit.
C)commercial banks can create money when a bank lends out funds borrowed from another customer who invested in a time deposit.
D)none of the options
Q2) ABC International can borrow $4,000,000 at LIBOR plus a lending margin of 0.65 percent per annum on a three-month rollover basis from Barclays in London.Three month LIBOR is currently 5.5 percent.Suppose that over the second three-month interval
LIBOR falls to 5.0 percent.How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A)$50,000
B)$100,000
C)$118,000
D)$120,000
Q3) Edge Act banks are not prohibited from owning equity in business corporations,unlike domestic commercial banks.
A)True
B)False
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Page 13
Chapter 12: International Bond Market
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Sample Questions
Q1) Investors will generally accept a lower yield on ________ than on ________ of comparable terms,making them a less costly source of funds for the issuer to service.
A)bearer bonds; registered bonds
B)registered bonds; bearer bonds
C)Eurobonds; domestic bonds
D)domestic bonds; Eurobonds
Q2) Securities sold in the United States to public investors must be registered with the SEC,and a prospectus disclosing detailed financial information about the issuer must be provided and made available to prospective investors.This encourages foreign borrowers wishing to raise U.S.dollars to use
A)the Eurobond market.
B)their domestic market.
C)bearer bonds.
D)none of the options
Q3) Two major clearing systems for international bond transactions are
A)Euroclear and Clearstream International.
B)Euroclear and Clearasil.
C)Deutsche Börse Clearing and Cedel International.
D)none of the options
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Page 14
Chapter 13: International Equity Markets
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Sample Questions
Q1) The exchange markets in the U.S.are
A)agency markets.
B)auction markets.
C)agency/auction markets.
D)none of the options
Q2) Many of the small foreign equity markets (e.g.,Argentina,Sri Lanka)
A)have poor liquidity at present.
B)are very liquid stock markets,since the poor people living there are eager to sell their securities.
C)have fairly high turnover ratios indicating strong liquidity.
D)none of the options
Q3) A measure of "liquidity" for a stock market is
A)the times interest earned ratio.
B)the ratio of stock market transactions over a period of time divided by the size,or market capitalization,of the stock market.
C)the LIBOR rate.
D)the times interest earned ratio,as well as the ratio of stock market transactions over a period of time divided by the size,or market capitalization,of the stock market.
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Page 15
Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Pricing a currency swap after inception involves
A)finding the difference between the present values of the payments streams the party will receive in one currency and pay in the other currency,converted to a common currency.
B)sending a market order to a swap dealer.
C)finding the sum of the present values of the payments streams that each party will receive in one currency and pay in the other currency,converted to a common currency.
D)none of the options
Q2) Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm
A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
\[\begin{array} { l l l }
& \$ & £ \\
\text { A } & \$ 6 \% & £5 \% \\
B & \$7 \% & £ 4\%
\end{array}\] Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6 percent USD loan into a 2-year pound denominated loan.
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Page 16
Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock on margin with only 40 percent down and 60 percent borrowed.The stock pays a £0.30 quarterly dividend,and after one year the investment sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound.The interest on the margin loan is 1 percent per year.The margin loan is denominated in pounds.
Q2) Assume that you have invested $100,000 in Japanese equities.When purchased,the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively.At selling time,one year after purchase,they were ¥110 and ¥110/$1.00.If the investor had sold ¥10,000,000 forward at the forward exchange rate of ¥105/$1.00 the dollar rate of return would be
A) 27.27 percent.
B)4.33 percent.
C)28.00 percent.
D) 9.09 percent.
Q3) The less correlated the securities in a portfolio,
A)the lower the portfolio risk.
B)the higher the portfolio risk.
C)the lower the unsystematic risk.
D)the higher the diversifiable risk.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Examples of operational risk include
A)the unexpected imposition of capital controls,inbound or outbound,and withholding taxes on dividend and interest payments.
B)unexpected changes in environmental policies,sourcing/local content requirements,minimum wage law,and restriction on access to local credit facilities.
C)restrictions imposed on the maximum ownership share by foreigners,mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements),and the nationalization of local operations of MNCs.
D)none of the options
Q2) Political risk refers to
A)the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country.
B)macroeconomic risks.
C)microeconomic risks.
D)bankruptcy or high inflation rates.
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Chapter 17: International Capital Structure and the Cost of Capital
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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 options
Q2) Solve for the weighted average cost of capital. \(\begin{aligned}
13.60 \% &=K_{1} \\
3 / 4 &=\lambda \\
8.0 \% &=i \\
40.0 \% 0 &=\tau
\end{aligned}\)
A)7.00 percent
B)6.89 percent
C)6.73 percent
D)6.67 percent
Q3) In the real world,does the cost of capital differ among countries?
A)Yes
B)No
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Chapter 18: International Capital Budgeting
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Q1) i = r<sub>debt</sub> = 10% OCF<sub>0</sub> = $100,000 K<sub>u</sub> = r<sub>assets</sub> = 15% OCF<sub>1-4</sub><sub> </sub>= $39,800 = 25,000 × ($5 $3)× (1 0.34)+ $20,000 × 0.34 K<sub>l</sub> = r<sub>equity</sub> = 24.9% OCF<sub>5</sub> = $43,100 = $39,800 + $5,000 × (1 0.34)K = r<sub>WACC</sub> = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
When using the APV methodology,what is the NPV of the depreciation tax shield?
A)$32,051.52
B)$25,777.35
C)$22,794.65
D)$97,152.98
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Page 20
Chapter 19: Multinational Cash Management
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Q1) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000): \[\begin{array} { | l | c | c | c | c | }
\hline & { \text { Disbursements } } \\
\hline \text { Receipts } & \text { U.S. } & \text { Canida } & \text { Cermany } & \text { U.K } \\
\hline \text { U.S. } & & 10 & 5 & 15 \\
\hline \text { Carada } & 10 & & 5 & 20 \\
\hline \text { Germarty } & 5 & 5 & & 5\\
\hline \text { U.K. } & 15 & 20 & 5 & \\
\hline
\end{array}\] Find the net cash flow in (out of)the German affiliate.
A)$0 in or out
B)$5,000 out
C)$30,000 in
D)$30,000 out
Q2) With a centralized cash depository
A)an MNC can facilitate fund mobilization.
B)system-wide excess cash is invested at the most advantageous rates.
C)system-wide cash shortages are borrowed at the most advantageous rates.
D)all of the options
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Page 21
Chapter 20: International Trade Finance
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Q1) An offset transaction
A)can be viewed as a counterpurchase trade agreement involving the aerospace/defense industry.
B)involves a technology transfer via the sale of a manufacturing plant: as part of the terms,the seller of the plant agrees to purchase a certain portion of the plant output.
C)is the purchase by a third party of one country's a clearing agreement balance for hard currency.
D)none of the options
Q2) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days.The importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is 2 percent.
Determine the amount the exporter will receive if he holds the B/A until maturity.
Q3) Banker's acceptances usually have maturities ranging from
A)30 to 180 days.
B)90 to 360 days.
C)1 year to 5 years.
D)over 5 years.
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22
Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Capital export neutrality
A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D)none of the options
Q2) Affiliate A sells a million units to Affiliate B per year.The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent.The transfer price can be set at any level between $100 and $200.Which transfer price between A and B should the parent select?
A)$200
B)$100
C)$150
D)none of the options
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