International Financial Management
Pre-Test Questions
Course Introduction
International Financial Management explores the concepts, frameworks, and strategies essential for managing financial operations in a global context. The course examines foreign exchange markets, international financial institutions, currency risk management, cross-border investment decisions, and sources of international financing. Emphasis is placed on understanding the impact of exchange rate fluctuations, international capital budgeting, multinational capital structure, and the regulatory environment affecting global financial management. Through case studies and real-world examples, students learn to analyze financial opportunities and challenges faced by multinational corporations and develop skills necessary for effective decision-making in the international financial marketplace.
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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Q1) State-owned investment funds that manage global portfolios of investment assets are known as
A) hedge funds.
B) sovereign wealth funds.
C) city-state pensions.
D) multinational mutual funds.
Answer: B
Q2) The main resources of the International Monetary Fund are provided by
A) the members of the World Bank.
B) its member countries primarily through payments of quotas.
C) members of the Organization for Economic Cooperation and Development.
D) the Bank for International Settlements.
Answer: B
Q3) What is the name for the shifting of non-strategic functions to specialist firms to reduce costs?
A) outsourcing
B) multinational company
C) globalization
D) transnational corporations
Answer: A
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Chapter 2: The Foreign Exchange Market
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Q1) Which one of the following firms dominates the foreign exchange markets?
A) No one firm dominates.
B) Deutsche Bank
C) UBS
D) Citigroup
Answer: A
Q2) What is most different about the foreign exchange market versus the New York Stock Exchange?
Answer: The interbank foreign exchange market is a very large,diverse,over-the-counter market,not a physical trading place such as the New York Stock Exchange where buyers and sellers gather in a specific geographic location to agree on a price to exchange currencies.Currency traders,who are employees of financial institutions in the major financial cities around the world,deal with each other primarily over the phone or via computer,with written or formal electronic confirmations of transactions occurring only later.
Q3) Describe how an exchange rate is like a market price?
Answer: The direct quote for a currency is the local currency price (numerator)of one unit of foreign currency (denominator).
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Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) 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
Q2) Why are the bid-ask spreads larger in the forward market than in the spot market?
A) because the forward market is less liquid than the spot market
B) because the spot market is more volatile than the forward market
C) because the forward market is more liquid than the spot market
D) because the spot market is less liquid than the forward market
Answer: A
Q3) Why would an MNC use a spot-forward swap?
Answer: A spot-forward swap involves either the purchase of foreign currency spot against the sale of the same amount of foreign currency forward,or the sale of foreign currency spot against the purchase of the same amount of foreign currency forward.
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Chapter 4: The Balance of Payments
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Q1) The three major accounts of the ________ are the current account,the capital account and the official settlements account.
A) balance of payments
B) balance of trade
C) trade surplus
D) trade deficit
Q2) The purchases of goods and assets by foreign residents from domestic residents are ________ because they are a source of foreign exchange.________ increase the supply of foreign money in the foreign exchange market.
A) credit transactions
B) current account transactions
C) debit transactions
D) capital account transactions
Q3) What represents a credit to the investment income account of the balance of payments?
Q4) During the 1990s the countries of Mexico and Argentina went from economic paupers with huge foreign debts (capital account deficits)to countries posting strong economic growth and welcoming foreign investment.What would you expect these changes to do to their current account balances?
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Chapter 5: Exchange Rate Systems
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Q1) Why would a central bank buy or sell foreign currency?
Q2) What is the name of the unit of account created by the IMF which is sometimes used to denominate contracts?
A) European currency unit
B) special drawing right
C) floating currencies
D) basket of currencies
Q3) What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market,relative to another currency or a "basket" of currencies?
A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency
Q4) Official international reserves consist of three major components EXCEPT:
A) gold reserves.
B) foreign exchange reserves.
C) deposits of private financial institutions.
D) IMF-related reserves assets.
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Chapter 6: Interest Rate Parity
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Q1) If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?
Q2) Given an example of how a money market hedge is constructed?
Q3) If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.
A) liability
B) asset
C) forward contract
D) foreign bank account
Q4) 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
Q5) Identify an external currency market and how it operates?
Q6) Explain the bid-ask spread in the external currency market?
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) Modern portfolio theory developed by William F.Sharpe is the foundation of
A) currency market parity models
B) the balance sheet hedge
C) the capital asset pricing model
D) adjusted net present value model
Q2) Why is it true that the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate is equivalent to the hypothesis that the forward premium (or discount)on a foreign currency is an unbiased predictor of the rate of its appreciation (or depreciation)?
Q3) Regression tests of the unbiasedness hypothesis indicate that it is ________ with real life events.
A) an unbiased indicator of expected future exchange rates
B) very consistent
C) not consistent
D) has a strong correlation to the current account
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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Q1) One important reason to study the purchasing power parity theory is because
A) investors should borrow in a foreign currency, when there is a forward discount.
B) when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates.
C) forecasting exchange rates is difficult and PPP makes it easier.
D) it provides currency dealers with a way to identify arbitrage opportunities.
Q2) Which one of the following reasons for violations of the Law of One Price is the most obvious?
A) tariffs on imports
B) banking rules
C) industrial policies
D) exchange rate controls
Q3) Under what conditions could the law of one price be violated?
Q4) What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?
Q5) What effects do deviations from the law of one price have on absolute purchasing power parity?
Page 10
Q6) Explain what is meant by the real exchange rate?
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) Which of the following forecasting techniques is typically based on formal economic models of exchange determination,which link exchange rates to money supply,inflation rates,productivity growth rates,and the current account?
A) market-based forecasts
B) fundamental analysis
C) technical analysis
D) statistical analysis
Q2) The following three conditions together with the Fisher Hypothesis refer to as the international parity conditions EXCEPT:
A) covered interest rate parity.
B) nominal interest rate parity.
C) purchasing power parity.
D) uncovered interest rate parity.
Q3) Which of the following statistics would NOT be useful to forecast currency exchange rates?
A) the root mean square error
B) mean absolute deviation
C) the Sharpe ratio
D) the covariance with the benchmark currency changes
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Chapter 11: International Debt Financing
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Q1) Value at risk measures the dollar loss that a given portfolio position can experience with ________ probability over a given length of time.
A) 1%
B) 3%
C) 5%
D) 10%
Q2) What are the major features of the proposed Basel III?
Q3) ________ is the packaging of assets or obligations such as mortgages or car loans,into securities for sale to third parties.
A) Eurocredits
B) Floating-rate notes
C) Asset securitization
D) Demutualization
Q4) Which one of the two main segments of the international bond market has the least local regulation? Why?
Q5) How is the final payment made for a dual-currency bond?
Q6) What are the three main sources of financing for any firm?
Q7) Why is there a need for international banking regulation?
Page 13
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Chapter 12: International Equity Financing
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Q1) ________ trading systems,often found in foreign exchange markets,are good examples of markets in which market makers stand prepared to buy at their bid prices and sell at the ask or offer prices.
A) Order-driven
B) Price-driven
C) Cross-listed
D) Cross-holding
Q2) What are the most import characteristics of foreign securities that leads to diversification benefits?
Q3) All of the following are true about an American Depository Receipt EXCEPT:
A) the depositary bank converts all dividends and other payments into U.S. dollars.
B) there are no custodial fees.
C) shares are held in custody by a U.S. depository bank.
D) it represents a specific number of shares in the home market.
Q4) How have global stock markets adjusted to competitive pressure from global investors?
Q5) What is distinguishes a public from a banker's bourse?
Q6) How are ADRs differentiated?
Q7) What is a price-driven trading system?
Page 14
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Chapter 13: International Capital Market Equilibrium
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Q1) Which one of the following causes the regression computation of a stock's beta to be imprecise?
A) total risk
B) systematic risk
C) idiosyncratic risk
D) home country bias
Q2) The APT postulates that other economy-wide factors can systematically affect the returns on a large number of securities.These factors might include all of the following EXCEPT:
A) news about inflation.
B) interest rates.
C) gross national product.
D) unemployment rate.
Q3) According to the CAPM how is the risk premium on an individual security calculated?
Q4) What is the name given to the variance that cannot be diversified away?
A) nonsystematic covariance
B) market covariance
C) nonsystematic variance
D) systematic variance
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Chapter 14: Country and Political Risk
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Q1) Suppose you are the Minister of Labor in Brazil and your government is proposing to raise the minimum wage to raise the income of the poorer workers and thereby offset the effects of other economic policies that man adversely impact them.Others in the cabinet are concerned about the effects of the policy will have on employment and competitiveness.What is your response to them?
Q2) Which one of the following is a method to minimize the chance that political risk events will adversely affect the firm?
A) focus on the long term
B) rely on common available supplies
C) use local resources
D) refuse to bargain with the government
Q3) Political risk is the risk that a ________ will negatively affect a company's cash flows.
A) company's management error
B) government action
C) labor strike
D) recession
Q4) What are some indicators of country health?
Q5) How might a government budget deficit lead to inflation?
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Chapter 15: International Capital Budgeting
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Q1) When discounting cash flows,it is important that only the ________,after-tax cash flows be used.
A) monthly
B) annual
C) incremental
D) total
Q2) Suppose you are conducting a financial analysis of a potential acquisition target,and you have been asked to identify the firm's engine of growth.Upon which of the following would you focus your analysis?
A) accounts receivable turnover
B) capital expenditures
C) debt to equity ratio
D) the firm's overall capital structure
Q3) Issuing equity to raise capital is expensive because in addition to the compensation the financial intermediary requires,there will also be an expense as a result of the
A) government taxes on the equity raise.
B) foreign exchange rate change.
C) fees charged by the Securities and Exchange Commission.
D) underwriting discount.
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) ________ is the capital budgeting approach that finds the value of the leveraged firm by discounting forecasts of all-equity free cash flows with a weighted average of the required rates of return to the firm's debt and equity.
A) Flow-to-equity
B) Weighted average cost of capital
C) Weighted average cost of capital and net income
D) Discounted cash flow and net income
Q2) Which one of the following would be the most important to take into account when doing international capital budgeting?
A) the country's political risk
B) the business risk of selling the firm's product into a foreign market
C) the prevailing global cost of capital
D) differences in accounting conventions across countries
Q3) When using the WACC for international projects,the weights should be specific to the ________ and not the overall firm.
A) cash flows
B) tax rate
C) international project
D) terminal value
Page 18
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Chapter 19: Managing Net Working Capital
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Q1) To avoid paying the higher corporate tax to a foreign government,a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible.
A) low
B) high
C) neutral
D) proportional
Q2) Which one of the following represents the most serious risk that arises when the government of a foreign country makes the nation's currency inconvertible?
A) controlled exchange rates
B) managed currency
C) blocked funds
D) expropriation
Q3) What is the term that refers to a firm's stock of cash,marketable securities,accounts receivable,and inventories?
A) working capital
B) cash
C) marketable securities
D) accounts receivable
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Chapter 20: Foreign Currency Futures and Options
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Q1) What is the term for the revenue immediately generated from exercising a currency option?
A) open interest
B) leading payment
C) margin
D) intrinsic value
Q2) What is the name of the total number of contracts outstanding for a particular derivative contract?
A) a long position
B) open interest
C) settle amount
D) open settlement
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) Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge with a forward contract in a bidding situation?
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