International Finance
Pre-Test Questions
Course Introduction
International Finance explores the principles and practices governing the flow of capital across international borders, focusing on the financial management of multinational corporations, foreign exchange markets, and balance of payments. The course examines exchange rate determination, forecasting, risk management strategies, international investment decisions, and the impact of global financial institutions. It aims to provide students with a comprehensive understanding of how international financial markets operate, the challenges of operating in different currency regimes, and the tools required to manage the financial risks inherent in a globalized economy.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
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Page 2
Chapter 1: Globalization and the Multinational Corporation
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Sample Questions
Q1) Globally why are certain types of firms seeking others with poor corporate governance?
Answer: Hedge funds and private equity firms are very often looking for these poorly performing firms as potential targets for their value-enhancing activities.
Q2) Which of the following was created in an effort to promote free trade?
A) World Trade Organization
B) the Sarbanes-Oxley Act
C) multilateral development banks
D) the Organization for Economic Cooperation and Development
Answer: A
Q3) In the economic field of agency theory,which one of the following is viewed as an agent with the principals who are most importantly the firm's shareholders?
A) suppliers
B) employees
C) managers
D) attorneys
Answer: C
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Chapter 2: The Foreign Exchange Market
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Sample Questions
Q1) When does delivery occur on a spot contract?
Answer: When currencies in the interbank spot market are traded,certain business conventions are followed.For example,when the trade involves the U.S.dollar,business convention dictates that spot contracts are settled in 2 business days-that is,the payment of one currency and receipt of the other currency occurs in 2 business days.One business day is necessary because of the back-office paperwork involved in any financial transaction.The second day is needed because of the time zone differences around the world.
Q2) Why are the bid-ask spreads quoted in the interbank spot market? What is their purpose?
Answer: The purpose of the bid-ask spread is to allow traders to profit by buying a currency at a low bid price and selling that currency at a higher ask price.Bid-ask spreads in the spot foreign exchange market are quite small,often a difference of only two or three basis points.A yen-dollar trader might quote a bid price of yen per dollar at which she is willing to buy dollars in exchange for yen of,say,¥104.30/$.The trader would then quote a higher ask price at which she is willing to sell dollars for yen,say,at an exchange rate of ¥104.35/$.
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Page 4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Sample Questions
Q1) In a forward contract no monies change hands until the maturity date of the contract known as the ________,
A) spot value date
B) exercise date
C) forward contract date
D) forward settlement date
Answer: D
Q2) What is the name of the contract where corporations,institutional investors,and individuals are required to pay or to receive a specific amount of foreign currency at a specific exchange rate at a particular date in the future?
A) forward foreign exchange market
B) forward currency contract
C) forward rate contract
D) future hedge contract
Answer: B
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5
Chapter 4: The Balance of Payments
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Q1) In a freely floating exchange rate system,if the capital account is running a deficit
A) the balance of payments must run a deficit.
B) the balance of payments must be zero.
C) the current account must run a surplus.
D) both B and C.
Q2) Tourism would show up on the
A) merchandise account.
B) current account.
C) capital account.
D) A and C.
Q3) Every ________ can be considered to have a corresponding flow of foreign money associated with it,and this flow of foreign money is recorded as a ________.
A) credit transaction
B) current account transaction
C) debit transaction
D) capital account transaction
Q4) What does it mean for a country to experience a capital inflow? Is this associated with a surplus or a deficit on the country's capital account?
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6
Chapter 5: Exchange Rate Systems
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Q1) In fixed exchange rate systems,the tendency is for the domestic currency to be
A) undervalued
B) at parity
C) overvalued
D) unchanged relative to the rest of the world's currencies
Q2) Which of the following would NOT be a major component of a country's official reserves?
A) foreign exchange
B) IMF-related reserve assets
C) gold
D) government bonds
Q3) What is the name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank?
A) retained earnings
B) excess reserves
C) margin account
D) required reserves
Q4) Describe the Bretton Woods currency system?
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Chapter 6: Interest Rate Parity
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Sample Questions
Q1) If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?
Q2) Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S.dollars.
Q3) If interest rate parity is satisfied,there are no opportunities for covered interest arbitrage.What does this imply about the relationship between spot and forward exchange rates when the foreign currency money market investment offers a higher return than the domestic money market investment?
Q4) Explain the bid-ask spread in the external currency market?
Q5) When parity conditions are not in effect in currency and money markets,traders could make extraordinary profits from a practice known as ________.
A) covered interest rate parity
B) covered interest rate arbitrage
C) triangular arbitrage
D) forward market arbitrage
Q6) Identify an external currency market and how it operates?
Q7) Given an example of how a money market hedge is constructed?
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) Which one of the following is NOT a drawback when economists use survey data to examine the unbiasedness hypothesis?
A) Participants may not have an incentive to respond honestly.
B) Participants' investment actions are not consistent with their answers.
C) Selfish motives are generally not significant.
D) They don't know the marginal investor's expectations.
Q2) It is often argued that forward exchange rates should be unbiased predictors of future spot exchange rates.When the foreign exchange market is efficient,forward rates are not able to be an unbiased predictor.Is this true or false?
Q3) What is the market portfolio?
A) the large, well-diversified portfolio that investors should hold according to finance theory
B) the large, well-diversified portfolio without international securities
C) the portfolio that represents a global portfolio
D) the portfolio with strictly domestic securities
Q4) Describe how you construct the uncertain \(£\)-denominated return from investing 1 \(£\) in the Swiss franc money market.
Q5) What is the main determinant of the volatility of forward market returns?
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Sample Questions
Q1) Explain what is meant by the real exchange rate?
Q2) All of the following options are reasons why the prices of goods and services deviate from the law of one price EXCEPT:
A) sticky prices.
B) speculation.
C) tariffs and quotas.
D) price index.
Q3) If people expect that their future purchasing power will decline,what will happen to the exchange rate today?
Q4) When the price level of an economy is ________,________ is occurring.Conversely,when the price level is ________,________ is occurring.
A) rising, deflation, falling, inflation
B) rising, inflation, falling, deflation
C) falling, inflation, rising, deflation
D) falling, deflation, rising, deflation
Q5) Under what conditions could the law of one price be violated?
Q6) What effects do deviations from the law of one price have on absolute purchasing power parity?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) What production process allows a multinational firm to shift or increase production to a plant in a country where the currency has depreciated in real terms in order to minimize costs?
A) input sourcing
B) production scheduling
C) plant location decisions
D) pricing policies
Q2) Lands' End is a U.S.mail-order company that sells clothing primarily from catalogs.Initially,all its catalog prices were quoted in U.S.dollars,but recently,the company has expanded and begun printing catalogs with prices denominated in British pounds.Given that the company wants to stand behind its prices for several months,what should the company do if the dollar-pound exchange rate changes?
Q3) When a currency depreciates,if the firm increases it foreign currency price to maintain its profits,it will ________.
A) gain sales from foreign rivals
B) maintain its market share
C) lose sales to foreign rivals
D) be forced to exit the market
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11
Chapter 10: Exchange Rate Determination and Forecasting
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Q1) Which of the following options is NOT a correct reason to why discuss technical analysis?
A) Forex dealers make extensive use of technical analysis.
B) The forward rate may not be an unbiased predictor of the future spot rate, even in an efficient market.
C) If a sufficiently large segment of the trading world is using technical analysis, demands and supplies to trade currencies will be buffeted by these traders even if they are irrational.
D) The variables on the fundamental analysis as well as the macroeconomic inputs are all available at frequent intervals.
Q2) Describe three statistics you should obtain from a currency-forecasting service in order to judge the quality of its currency forecasts.
Q3) Construct a list of a country's economic statistics you would assemble to help determine the probability of a devaluation of its currency within the coming year.
Q4) Why would technical analysis not be useful if the international parity conditions held?
Q5) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
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Chapter 11: International Debt Financing
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Sample Questions
Q1) The ________ is the discount rate or internal rate of return that equates the present value of all the future interest rate and principal payments to the net proceeds received by the issuer.
A) all-in-cost
B) internal rate of return
C) LIBOR rate
D) floating-rate note
Q2) Which type of bond is denominated in one or more currencies but is traded in external markets outside the borders of the countries issuing the currencies?
A) international bond
B) domestic bond
C) Eurobond
D) foreign bond
Q3) Which one of the two main segments of the international bond market has the least local regulation? Why?
Q4) What are the three main sources of financing for any firm?
Q5) How are the transactions in the global bond market in reality a simultaneous transaction in two separate markets?
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Chapter 12: International Equity Financing
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Sample Questions
Q1) Cross-listing of stocks and demutualization have led to the ________ of stock exchanges.
A) externalization
B) securitization
C) globalization
D) order-driven trading systems
Q2) ________,unlike ADRs,can trade across many markets and settle in the currency of each market.
A) Global registered shares
B) Global depository receipts
C) Euro equities
D) Cross-listed stock
Q3) Which of the following concepts refers to the process of converting exchanges from nonprofit,member-owned organizations to for-profit investor-owned and typically publicly traded companies?
A) demutualization
B) cross-listing
C) consolidation
D) alternative trading system
Q4) What is a price-driven trading system?
Page 14
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Chapter 13: International Capital Market Equilibrium
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Q1) Today in an increasingly globalized world,it makes more sense to use an internationally diversified portfolio of securities as the market portfolio.This CAPM is called the ________.
A) international CAPM
B) domestic CAPM
C) country CAPM
D) world CAPM
Q2) According to the CAPM how is the risk premium on an individual security calculated?
Q3) Why is the computation of cost of capital likely to be higher under the Fama-French model than the CAPM?
A) The Fama-French model does not use the difference in the return on a portfolio of small.
B) The Fama-French model does not use return on the value-weighted market portfolio.
C) The CAPM does not measure the market correlation.
D) Fama-French has two additional factors.
Q4) What would you expect to happen to the risk-free rate and equity returns when a segmented country opens its capital markets to foreign investment?
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Chapter 14: Country and Political Risk
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Questions
Q1) ________ is the name given the difference between the yield on a bond issued by a developing country in a currency and the government bond yield of the country that issues the currency.
A) The banking spread
B) The country risk premium
C) The country risk rating
D) The country credit spread
Q2) Which one of the following do MNCs use to lower the cost of their investment into a country?
A) foreign bond markets
B) international banks
C) debt-equity swaps
D) long-term forward contracts
Q3) Which one of the following is the name for the action of a country takes when it repays a loan at a discount?
A) debt buyback
B) discount bond exchange
C) par bond exchange
D) conversion bonds
Q4) What is the difference between political risk and sovereign risk?
Page 16
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Chapter 15: International Capital Budgeting
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Sample Questions
Q1) Suppose the parent MNC had a choice of licensing,royalties and overhead allocations to repatriate funds from its subsidiaries,which ones represent pure profit to the parent?
A) licensing and overhead allocations
B) licensing and royalties
C) royalties and overhead allocations
D) a combination of all three
Q2) The first step in deriving an ANPV for a project is to
A) add the net present value of financial side effects.
B) add the present value of any growth options.
C) calculate the net present value of the project's cash flows.
D) determine the terminal value of the project.
Q3) One of the problems with cash flow computations is that it often ignores ________.
A) real options
B) currency exposure
C) terminal value
D) incremental cash flows
Q4) How does the role of underwriting affect the issuing of securities?
Q5) What is meant by the cannibalization of an export market?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) Assuming an upward-sloping term structure of spot interest rates,if the expected profits from a foreign project are discounted by a higher discount rate found in later years,the ________ of the project is penalized needlessly.
A) future value
B) future market value
C) total risk
D) present value
Q2) What is the U.S.tax treatment of interest paid on a foreign currency loan?
Q3) Because the cash flows from an international project may be denominated in different currencies from the headquarters,one of the very first decisions is to A) do the valuation using forecasts of the foreign or home currency.
B) determine the salvage value at the terminal stage of the project.
C) calculate the stream of free cash flows.
D) arrange the financing in the foreign or domestic currency.
Q4) As an international financial analyst,you inform your superiors that the domestic currency discount rate can be used to do capital budgeting for a foreign project? Explain why.
Q5) Explain what is meant by the weighted average cost of capital?
Q6) Explain how to calculate the rate of return on invested capital?
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) Why does hedging reduce the firm's expected taxes and increase its value?
A) It creates a tax-loss carry-forward.
B) It separates production costs from headquarters' costs.
C) It provides the firm with additional expenses reducing taxable income.
D) It allows the firm to shift income across different tax jurisdictions in the world.
Q2) Modigliani and Miller argued that a corporation's financial policies,such as hedging foreign exchange risk,________ unless they lowered the firm's taxes,affected its investment decisions,or could be done more cheaply than individual investors' transactions could be done.
A) do not change the value of the firm's assets
B) always change the value of the firm's assets
C) were difficult to assess
D) were relevant to a firm's dividend policy
Q3) Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?
Q4) Why did Miller and Modigliani claim that hedging exchange rate risk was irrelevant to the value of the firm?
Q5) What are the gains from hedging foreign exchange risk?
Page 19
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Chapter 18: Financing International Trade
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Q1) What is the correct term for documentary credit that cannot be changed unless all parties involved first agree to the change?
A) revocable
B) irrevocable
C) confirmed
D) straight
Q2) What are four different methods by which an exporter can accept payment from an importer? List them in increasing order of risk to the importer.
Q3) When a bank accepts a time draft for payment and sells it in the money markets,it is known as a
A) time draft.
B) trade acceptance.
C) forfait transaction.
D) banker's acceptance.
Q4) From the importer's point of view the most attractive method of payment is A) open account.
B) time draft.
C) documentary collection.
D) documents against payment.
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Chapter 19: Managing Net Working Capital
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Q1) Using a centralized cash management system results in a decreased ________ cash demand.
A) transactions
B) long-term
C) precautionary
D) short-term
Q2) When an affiliate is located in a high tax jurisdiction,the general rule is to set the transfer price that another affiliate would charge as ________ as possible.
A) high
B) low
C) neutral
D) proportional
Q3) The prices a multinational affiliate may charge another affiliate when selling inputs or services to them are known as ________.
A) royalties
B) transfer prices
C) fees
D) dividends
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Chapter 20: Foreign Currency Futures and Options
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Q1) Which of the following conditions would be "in the money" for an American call option for foreign currency?
A) when the market price limits are reached and trading is halted
B) when the strike price is greater than the spot price
C) when the strike price is equal to the spot price
D) when the strike price is lower than the spot price
Q2) A major difference between foreign currency futures contracts and forward contracts is that forward contracts are ________.
A) sold by government agencies
B) created by banks
C) created by writers
D) marketed on the over-the-counter market
Q3) Which one of the following is an example of a currency futures exchange?
A) The Chicago Board of Trade
B) The New York Stock Exchange
C) The International Monetary Market
D) The Tokyo Stock Exchange
Q4) What effects does "marking to market" have on futures contracts?
Q5) What does it mean for an American option to be "in the money"?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) A currency swap is most similar in economic purpose to a A) basis swap.
B) parent company loan.
C) debt equity swap.
D) parallel loan.
Q2) What are some factors that underlie the economic benefits of swaps?
Q3) Between 2001 and 2004 the phenomenal growth in the use of swap markets has been a rate of over ________ per year.
A) 100%
B) 80%
C) 50%
D) 33%
Q4) The nature of swap contracts is usually based on the best practices suggested by the ________,
A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) International Swap and Derivatives Association
D) Securities Exchange Commission
Q5) Why are swap market transactions costs lower than transaction costs in the long term forward market?
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