Course Introduction
International Finance Exam Preparation Guide
International Finance examines the financial management of firms and organizations operating in a global environment. The course explores key topics such as foreign exchange markets, exchange rate determination, international monetary systems, currency risk management, and global capital markets. Students learn about international investment decisions, cross-border financing, the impact of political and economic events on international financial flows, and the role of international financial institutions. Through case studies and real-world examples, the course equips learners with the analytical tools and frameworks necessary to understand and navigate the complexities of global financial operations.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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21 Chapters
1584 Verified Questions
1584 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) An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?
A)assembly line production
B)specialized professional services
C)nuclear missile programs
D)development of more sophisticated computer technology
Answer: A
Q2) One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems.
A)True
B)False Answer: True
Q3) A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.
A)True
B)False Answer: True
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) The J-curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.
A)True
B)False
Answer: True
Q2) Which of the following is not a goal of the International Monetary Fund (IMF)?
A)To promote cooperation among countries on international monetary issues
B)To promote stability in exchange rates
C)To enhance a country's long-term economic growth via the extension of structural adjustment loans
D)To promote free trade
E)To promote free mobility of capital funds across countries
Answer: C
Q3) U.S. government officials would likely prefer that China devalue the yuan against the dollar.
A)True
B)False
Answer: False
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Chapter 3: International Financial Markets
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101 Flashcards
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Sample Questions
Q1) Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables?
A)Purchase pounds forward.
B)Buy a pound futures contract.
C)Buy a pound put option.
D)Buy a pound call option.
Answer: C
Q2) As a result of the Smithsonian Agreement, the U.S. dollar was:
A)the currency to be used by all countries as a medium of exchange for international trade.
B)forced to be freely floating relative to all currencies without any boundaries.
C)devalued relative to major currencies.
D)revalued (upward) relative to major currencies.
Answer: C
Q3) The strike price on a currency option is also known as the exercise price.
A)True
B)False
Answer: True
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5
Chapter 4: Exchange Rate Determination
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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) Increases in relative income in one country versus another result in an increase in the first country's currency value.
A)True
B)False
Q3) Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.
A)True
B)False
Q2) You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
A)-$.03.
B)-$.02.
C)-$.01.
D)$.02.
E)none of the above
Q3) A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures contracts.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.
A)True
B)False
Q2) A strong dollar is normally expected to cause:
A)high unemployment and high inflation in the U.S.
B)high unemployment and low inflation in the U.S.
C)low unemployment and low inflation in the U.S.
D)low unemployment and high inflation in the U.S.
Q3) An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
A)True
B)False
Q4) Direct intervention is usually more effective than indirect intervention.
A)True
B)False
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8
Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have aFter 180 days?
A)$318,109.10
B)$330,000.00
C)$312,218.20
D)$323,888.90
E)none of the above
Q2) The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula
A)True
B)False
Q3) If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.
A)True
B)False
Q4) The yield curve of every country has its own unique shape
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) Which of the following is not true regarding limitations of PPP and the IFE?
A)A limitation of the IFE is that the determination of the expected inflation rate is subject to error.
B)A limitation in testing PPP is that the results will vary with the base period used.
C)A limitation of the PPP and the IFE (because it relies on the PPP) is that other country characteristics besides inflation can affect exchange rate movements.
D)All of the above are true.
Q2) Which of the following is not true regarding IRP, PPP, and the IFE?
A)IRP suggests that a currency's spot rate will change according to interest rate differentials.
B)PPP suggests that a currency's spot rate will change according to inflation differentials.
C)The IFE suggests that a currency's spot rate will change according to interest rate differentials.
D)All of the above are true.
Q3) If interest rate parity holds, then the international Fisher effect must hold.
A)True
B)False
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Page 10
Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?
A)$.131
B)$.226
C)$.262
D)$.140
E)$.174
Q2) 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
Q3) The potential forecast error is larger for currencies that are more volatile.
A)True
B)False
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11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.
A)True
B)False
Q2) Under FASB 52:
A)translation gains and losses are included in the reported net income.
B)translation gains and losses are included in stockholder's equity.
C)A and B
D)none of the above
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
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:
A)a money market hedge.
B)a forward sale of yen.
C)purchasing yen call options.
D)purchasing yen put options.
E)selling yen put options.
Q2) If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
A)True
B)False
Q3) A money market hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) The management of economic exposure is normally focused completely on transactions that will occur in the next three months.
A)True
B)False
Q2) If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.
A)negative
B)adversely affected
C)favorably affected
D)unaffected
Q3) An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars.
A)more; fewer
B)more; more
C)less; fewer
D)less; more
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) The ____ the variability of a project's cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project.
A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher
Q2) To fully benefit from use of foreign raw materials:
A)establish a subsidiary in a market where raw materials are cheap and accessible.
B)sell the finished product to countries where the raw materials are more expensive.
C)establish a subsidiary in a new market that can sell products produces elsewhere.
D)A and B
Q3) ____ is not a disadvantage of direct foreign investment.
A)The expense of establishing a foreign subsidiary
B)The uncertainty of inflation and exchange rate movements
C)Political risk
D)All of the above are disadvantages of direct foreign investment.
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.
A)True
B)False
Q2) An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. 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
Q3) 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) It is always the best course of action to divest a foreign project if the expected cash flows from the project decline substantially.
A)True
B)False
Q2) Which of the following would probably not cause the stock price of a foreign target to decrease?
A)Its expected cash flows decline.
B)General stock market conditions in the foreign country are deteriorating.C
C)Investors anticipate that the target will be acquired.
D)All of the above will cause the target's stock price to decrease.
Q3) Acquirers may have different required rates of return because of differences in the local risk-free interest rate.
A)True
B)False
Q4) A call option on real assets represents a proposed project that contains an option of pursuing an additional venture.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) When using a checklist approach to assess country risk, factors should be converted to some numerical forms and assigned equal weights.
A)True
B)False
Q2) Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC's products.
A)True
B)False
Q3) The checklist approach:
A)requires several inspections of the country being evaluated.
B)requires the use of discriminant analysis to assess country risk.
C)requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D)involves the collection of independent opinions on country risk.
Q4) Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.
A)True B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.
A)True
B)False
Q2) The ____ an MNC, the ____ its cost of capital is likely to be.
A)larger; higher B)larger; lower
C)smaller; lower
D)A and C
Q3) One argument for why subsidiaries should be allowed to issue their own stock is that:
A)it prevents a potential conflict of interests between the MNC's managers and shareholders.
B)it prevents a potential conflict of interests between the MNC's majority shareholders and minority shareholders.
C)it prevents a potential conflict of interests between the MNC's existing creditors.
D)having local investors as minority shareholders may offer some protection against adverse actions by the local government.
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Page 19
Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) Assume a U.S.-based subsidiary wants to raise $1 million by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1 million needed.
A)50,000,000
B)20,000
C)1,000,000
D)none of the above
Q2) An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
A)convert to floating-rate payments.
B)hedge exchange rate risk.
C)lock in the interest payments on its debt.
D)eliminate the credit risk of its debt.
Q3) If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
A)a foreign currency; weakens
B)dollars; strengthens
C)a foreign currency; strengthens D)dollars; weakens
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Chapter 19: Financing International Trade
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Sample Questions
Q1) When an exporter sells an account receivable to a factor, the factor will attempt to collect payment from the importer, but if the importer is unable to pay, the factor can collect the payment from the exporter.
A)True
B)False
Q2) An importer always has the option to cancel an irrevocable letter of credit.
A)True
B)False
Q3) ____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, from the original holder, usually the exporter; the obligations are sold "without recourse," meaning that if the importer does not pay, the exporter has no responsibility for their payment.
A)Factoring
B)Accounts receivable financing
C)Forfaiting
D)None of the above
Q4) There is an active secondary market for banker's acceptances.
A)True
B)False
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) MNCs may be able to lock in a lower cost by financing in a low-interest rate foreign currency if they have:
A)future cash inflows in that foreign currency.
B)future cash outflows in that foreign currency.
C)offsetting future cash inflows and outflows in that foreign currency.
D)no other cash flows in that foreign currency.
Q2) If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).
A)True
B)False
Q3) Which of the following is not a source of external short-term financing for MNCs?
A)Eurobonds
B)Euro-commercial paper
C)Euronotes
D)ADRs
E)A and D
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Chapter 21: International Cash Management
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Sample Questions
Q1) According to ____, the effective yield earned by U.S. investors will be the same as the effective yield earned by non-U.S. investors in any given period.
A)interest rate parity (IRP)
B)the international Fisher effect (IFE)
C)purchasing power parity (PPP)
D)none of the above
Q2) MNCs typically consider all but the following ____ when investing cash over a short-term period
A)large deposits at commercial banks
B)Treasury bills
C)commercial paper
D)foreign stocks
Q3) An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2 percent. If the Singapore dollar appreciates by less than 2 percent, the investment in Singapore will be more attractive.
A)True
B)False
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23