International Finance
Exam Materials
Course Introduction
International Finance explores the fundamental principles and practices governing financial interactions between countries, focusing on topics such as exchange rates, balance of payments, international monetary systems, and global financial markets. This course examines how multinational corporations manage currency risk, raise capital in global markets, and navigate international investment decisions. Students will also analyze the impact of governmental policies, economic integration, and international financial institutions on cross-border transactions, developing a comprehensive understanding of the challenges and opportunities in the global financial environment.
Recommended Textbook
International Financial Management 8th Edition by Madura
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21 Chapters
1110 Verified Questions
1110 Flashcards
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Chapter 1: Multinational Financial Management: An Overview
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) Which of the following is not mentioned in the text as a constraint interfering with the MNC goal
A) economic constraints.
B) environmental constraints.
C) regulatory constraints.
D) ethical constraints.
Answer: A
Q2) In comparing exporting to direct foreign investment (DFI),an exporting operation will likely incur __________ fixed production costs and __________ transportation costs than DFI.
A) higher;higher
B) higher;lower
C) lower;lower
D) lower;higher
Answer: D
Q3) The North American Free Trade Agreement (NAFTA)of 1993 eliminated trade barriers between the United States and Mexico.
A)True
B)False
Answer: True
Page 3
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Chapter 2: International Flow of Funds
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46 Flashcards
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Sample Questions
Q1) Portfolio investment represents 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
Q2) _________ purchases more U.S.exports than any other country.
A) Japan
B) United Kingdom
C) Mexico
D) Canada
Answer: D
Q3) Which of the following is the biggest target of direct foreign investment by U.S.firms
A) Mexico.
B) Japan.
C) United Kingdom.
D) Germany.
Answer: C
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Chapter 3: International Financial Markets
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.
A)True
B)False
Answer: False
Q2) Under the gold standard,each currency was convertible into gold at a specified rate,and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.
A)True
B)False Answer: True
Q3) A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Exchange Rate Determination
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45 Verified Questions
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Sample Questions
Q1) Which of the following is not mentioned in the text as a factor affecting exchange rates
A) relative interest rates.
B) relative inflation rates.
C) government controls.
D) expectations.
E) all of the above are mentioned in the text as factors affecting exchange rates.
Q2) When the "real" interest rate is relatively low in a given country,then the currency of that country is typically expected to be:
A) weak, since the country's quoted interest rate would be high relative to the inflation rate.
B) strong, since the country's quoted interest rate would be low relative to the inflation rate.
C) strong, since the country's quoted interest rate would be high relative to the inflation rate.
D) weak, since the country's quoted interest rate would be low relative to the inflation rate.
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Chapter 5: Currency Derivatives
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103 Verified Questions
103 Flashcards
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Sample Questions
Q1) If an investor who has previously purchased a futures contract wishes to liquidate his or her position,he or she would sell an identical futures contract with the same settlement date.
A)True
B)False
Q2) Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a _______ of _______.
A) premium;about 6%
B) discount;about 6%
C) discount;about 6.45%
D) premium;about 6.45%
Q3) When the futures price on euros is below the forward rate on euros for the same settlement date,astute investors may attempt to simultaneously __________ euros forward and __________ euro futures.
A) sell;sell
B) buy;sell
C) sell;buy
D) buy;buy
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) To strengthen the dollar using sterilized intervention,the Fed would _____________ dollars and simultaneously ____________ Treasury securities.
A) buy;sell
B) sell;buy
C) buy;buy
D) sell;sell
Q2) The term "target zone arrangement" refers to a:
A) situation where countries adjust their national economic policies to maintain exchange rates within some predetermined limits.
B) system where several central banks act in a coordinated intervention to keep the price of one country's currency within reasonable trading ranges.
C) system where currencies are pegged to gold, or to hard currency.
D) system where local currencies are replaced by dollars.
Q3) A potential advantage of exchange rate target zones is that they may stabilize international trade patterns by reducing exchange rate volatility.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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58 Flashcards
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Sample Questions
Q1) If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank,locational arbitrage is possible.
A)True
B)False
Q2) Assume the following exchange rates: $1 = NZ$3,NZ$1 = MXP2,and $1 = MXP5. Given this information,as you and others perform triangular arbitrage,the exchange rate of the New Zealand dollar (NZ)with respect to the U.S.dollar should _______,and the exchange rate of the Mexican peso (MXP)with respect to the U.S.dollar should _______.
A) appreciate;depreciate
B) depreciate;appreciate
C) depreciate;depreciate
D) appreciate;appreciate
E) remain stable;appreciate
Q3) Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.
A)True
B)False
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Chapter 8: Relationships among Inflation,Interest Rates,and Exchange Rates
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37 Verified Questions
37 Flashcards
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Sample Questions
Q1) You have an opportunity to invest in Australia at an interest rate of 8%.Moreover,you expect the Australian dollar (A$)to appreciate by 2%.Your effective return from this investment is:
A) 8.00%.
B) 6.00%.
C) 10.16%.
D) 5.88%.
Q2) Interest rate parity can only hold if purchasing power parity holds.
A)True
B)False
Q3) Which of the following is indicated by research regarding purchasing power parity (PPP)
A) PPP clearly holds in the short run.
B) Deviations from PPP are reduced in the long run.
C) PPP clearly holds in the long run.
D) There is no relationship between inflation differentials and exchange rate movements in the short run or long run.
Q4) If interest rate parity holds,then the international Fisher effect must hold.
A)True B)False
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Chapter 9: Forecasting Exchange Rates
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58 Verified Questions
58 Flashcards
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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) If the pattern of currency values over time appears random,then technical forecasting is appropriate.
A)True
B)False
Q3) If points are scattered evenly on both sides of the perfect forecast line,then the forecast appears to be very accurate.
A)True
B)False
Q4) Factors such as economic growth,inflation,and interest rates are an integral part of __________ forecasting.
A) technical
B) fundamental
C) market-based
D) none of the above
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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59 Flashcards
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Sample Questions
Q1) If the functional currencies for reporting purposes are highly correlated,translation exposure is magnified.
A)True
B)False
Q2) Dubas Co.is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece.Both subsidiaries frequently remit their earnings back to the parent company.The German subsidiary generated a net outflow of 2,000,000 this year,while the Greek subsidiary generated a net inflow of 1,500,000.What is the net inflow or outflow as measured in U.S.dollars this year The exchange rate for the euro is $1.05.
A) $3,675,000 outflow
B) $525,000 outflow
C) $525,000 inflow
D) $210,000 outflow
Q3) Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.
A)True
B)False
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Page 12
Chapter 11: Managing Transaction Exposure
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63 Verified Questions
63 Flashcards
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Sample Questions
Q1) The price at which a currency put option allows the holder to sell a currency is called the settlement price.
A)True
B)False
Q2) When the real cost of hedging is positive,this implies that hedging was more favorable than not hedging.
A)True
B)False
Q3) From the perspective Detroit Co.that has payables in Mexican pesos and receivables in Canadian dollars,hedging the payables would be most desirable if the expected real cost of hedging payables is _______,and hedging the receivables would be most desirable if the expected real cost of hedging receivables is _______.
A) negative;positive
B) zero;positive
C) zero;zero
D) positive;negative
E) negative;negative
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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43 Verified Questions
43 Flashcards
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Sample Questions
Q1) To hedge translation exposure,MNCs could _______ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.
A) purchase the currency forward
B) sell the currency forward
C) purchase futures contracts of the currency
D) A or C
E) none of the above
Q2) Rockford Co.is a U.S.manufacturing firm that produces goods in the U.S.and sells all products to retail stores in the U.K.;the goods are denominated in pounds. It finances a small portion of its business with pounddenominated loans from British banks. Which of the following is true (Assume that the amount of products to be sold is guaranteed by contracts.)
A) The dollar value of sales is higher if the pound depre ciates against the dollar.
B) The dollar value of sales is unaffected by the pound's exchange rate.
C) A and B
D) None of the above
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Page 14
Chapter 13: Direct Foreign Investment
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45 Flashcards
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Sample Questions
Q1) Based on the text,it should be obvious that markets are__________ in reality,and consequently,monopolistic advantages _________ be exploited.
A) perfect;may possibly
B) perfect;cannot
C) imperfect;may possibly D) imperfect;cannot
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) Direct foreign investment (DFI)represents investment in real assets (such as land,buildings,or even existing plants)in foreign countries.
A)True
B)False
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15
Chapter 14: Multinational Capital Budgeting
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49 Flashcards
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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) An MNC is considering establishing a twoyear project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2,excluding the salvage value. Assume no taxes,and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value
A) about NZ$11 million.
B) about NZ$15 million.
C) about NZ$31 million.
D) about NZ$37 million.
E) about NZ$25 million.
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Page 16
Chapter 15: Multinational Restructuring
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) 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.
Q2) A foreign target's expected future cash flows generally vary among different MNCs valuing the target.
A)True
B)False
Q3) Which of the following tax-related factors need not be considered in assessing a foreign target
A) corporate tax rates in the host country.
B) withholding tax rates in the host country.
C) withholding tax rates in the home country.
D) corporate tax rates in the home country.
E) all of the above must be considered in assessing a foreign target.
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Chapter 16: Country Risk Analysis
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49 Verified Questions
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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) Risk assessors almost always arrive at the same opinion after completing a macroassessment of country risk.
A)True
B)False
Q3) 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
Q4) The most important variable in determining a country's degree of overall country risk:
A) is political risk.
B) is financial risk.
C) is the probability of a host government takeover.
D) may often vary with the country of concern.
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Country differences,such as differences in the risk-free interest rate and differences in risk premiums across countries,can cause the cost of capital to vary across countries.
A)True
B)False
Q2) Generally speaking,an MNC's size,its access to international capital markets,and international diversification are unfavorable to an MNC's cost of capital.
A)True
B)False
Q3) According to the CAPM,the required rate of return on stock is a positive function of all of the following,except:
A) the risk-free rate of interest.
B) the market rate of return.
C) the stock's beta.
D) the company's earnings.
Q4) Normally,an MNC will issue stock in all of the countries where it does business.
A)True
B)False
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Chapter 18: Long-Term Financing
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Sample Questions
Q1) A back-to-back (also called parallel)loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future.
A)True
B)False
Q2) Since yield curves are identical across countries,MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency.
A)True
B)False
Q3) A U.S.firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:
A) issuing Swiss franc denominated bonds.
B) purchasing Swiss franc denominated bonds.
C) purchasing U.S. dollar denominated bonds.
D) issuing U.S. dollar denominated bonds.
Q4) Eurobonds are often issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
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Page 20
Chapter 19: Financing International Trade
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Sample Questions
Q1) There is an active secondary market for banker's acceptances.
A)True
B)False
Q2) Which of the following is not a payment method used for international trade
A) consignment.
B) open account.
C) factoring.
D) draft.
E) letter of credit.
Q3) All types of foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country are called countertrade.
A)True
B)False
Q4) An irrevocable L/C obligates the issuing bank to honor all drawings presented in conformity with the terms of the L/C.
A) true.
B) false.
A)True
B)False
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) Assume that interest rates of most industrialized countries are similar to the U.S.interest rate. In the last few months,the currencies of all industrialized countries weakened substantially against the U.S.dollar. If nonU.S.firms based in these countries financed with U.S.dollars during this period (even when they had no receivables in dollars),their effective financing rate would have been:
A) negative.
B) zero.
C) positive, but lower than the interest rate of their respective countries.
D) higher than the interest rate of their respective countries.
Q2) Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S.perspective,the effective financing rate from borrowing francs is:
A) 8%.
B) 14.48%.
C) 2%.
D) 1.52%.
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) According to the text:
A) banks in most non U.S. countries are as capable as the U.S. in facilitating cash transfers and most other cash management operations for MNCs.
B) banks in most non U.S. countries are more advanced than the U.S. in facilitating cash transfers for MNCs.
C) an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists.
D) none of the above
Q2) Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%.At the time the investment is made,the spot rate of the rand is $.205.If the spot rate of the rand at maturity of the investment is $.203,what is the effective yield of investing in rand
A) 11.08%.
B) 8.92%.
C) 10.00%.
D) none of the above
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