International Financial Management
Chapter Exam Questions
Course Introduction
International Financial Management explores the principles and practices involved in financial decision-making within multinational corporations and global markets. The course examines topics such as foreign exchange markets, international financial instruments, currency risk management, cross-border investment decisions, global capital budgeting, and international financing strategies. Emphasis is placed on understanding the complexities of operating in diverse legal, economic, and political environments, enabling students to analyze and manage financial risks and opportunities in an interconnected world economy.
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International Financial Management 13th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Q1) Assume that an MNC purchases a foreign building, and then leases the building to another party and allows that party to operate the business in the building for 30 years if the party follows standards set by the MNC. This process is referred to as:
A)A foreign acquisition.
B)franchising.
C)a licensing agreement.
D)exporting.
Answer: A
Q2) Which of the following could reduce agency problems for an MNC?
A)stock options as managerial compensation
B)hostile takeover threat
C)investor monitoring
D)all of the above are forms of corporate control that could reduce agency problems for an MNC.
Answer: D
Q3) International trade is the most common form of direct foreign investment (DFI).
A)True
B)False
Answer: False
Page 3
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Chapter 2: International Flow of Funds
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Q1) Which of the following is not a result of the North American Free Trade Agreement (NAFTA)?
A)increased trade between the United States and Central American countries
B)increased imports by the United States from Mexico
C)increased exports by U.S. firms to Mexico
D)increased establishment of subsidiaries in Mexico by U.S. firms
Answer: A
Q2) A balance-of-trade deficit indicates an excess of imports over exports.
A)True
B)False
Answer: True
Q3) The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.
A)increased; increased
B)increased; decreased
C)decreased; decreased
D)decreased; increased
Answer: B
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4
Chapter 3: International Financial Markets
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Q1) An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.
A)True
B)False
Answer: False
Q2) In general, investors are attracted to stock markets in countries that allow very limited voting rights for shareholders.
A)True
B)False
Answer: False
Q3) In general, stock markets allow for more governance and attract more investors when they have all of the following except:
A)more voting rights for shareholders.
B)more legal protection for shareholders.
C)more enforcement of the laws.
D)less stringent accounting requirements.
Answer: D
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Page 5
Chapter 4: Exchange Rate Determination
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Q1) If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.
A)appreciate
B)depreciate
C)remain unchanged
D)cannot be determined from the information provided
Q2) An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.
A)reduce; increase
B)increase; reduce
C)reduce; reduce
D)increase; increase
Q3) The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.
A)True
B)False
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Chapter 5: Currency Derivatives
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Q1) A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?
A)$33,600.
B)$46,900.
C)$44,100.
D)$36,400.
Q2) Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A)Purchase a call option on francs.
B)Obtain a forward contract to purchase francs forward.
C)Sell a futures contract on francs.
D)All of the above are appropriate strategies for the scenario described.
Q3) If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.
A)True
B)False
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Page 7
Chapter 6: Government Influence on Exchange Rates
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Q1) Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.
A)True
B)False
Q2) The Asian crisis is generally believed to have started in Japan. A)True
B)False
Q3) China is commonly criticized for keeping the yuan's value at superficially high levels. A)True
B)False
Q4) The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies.
A)True
B)False
Q5) The Fed's indirect method of intervention is to trade dollars for or against other currencies.
A)True B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage
A)True
B)False
Q2) The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).
A)True
B)False
Q3) Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
A)transaction costs
B)political risk
C)differential tax laws
D)all of the above
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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Q1) Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____.
A)appreciate; 3 percent
B)appreciate; 1 percent
C)depreciate; 3 percent
D)depreciate; 2 percent
E)appreciate; 2 percent
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) Interest rate parity can only hold if purchasing power parity holds.
A)True
B)False
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Chapter 9: Forecasting Exchange Rates
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Q1) The closer graphical points are to the perfect forecast line, the better the forecast.
A)True
B)False
Q2) If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and the spot rate will provide similar forecasts.
A)True
B)False
Q3) Which of the following is true?
A)Forecast errors cannot be negative.
B)Forecast errors are negative when the forecasted rate exceeds the realized rate.
C)Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
D)None of the above.
Q4) The potential forecast error is larger for currencies that are more volatile. A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) Which of the following operations benefit(s) from depreciation of the firm's local currency?
A)borrowing in a foreign country and converting the funds to the local currency prior to the depreciation
B)purchasing foreign supplies
C)investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency
D)A and B
Q2) Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A)5.13 percent.
B)2.63 percent.
C)4.33 percent.
D)5.55 percent.
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Chapter 11: Managing Transaction Exposure
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Q1) If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will ____.
A)have the same result as a call option hedge on payables
B)have the same result as a put option hedge on payables
C)have the same result as a money market hedge on payables
D)require more dollars than a money market hedge
E)A and D
Q2) A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
A)the foreign currency; United States
B)the foreign currency; foreign country
C)dollars; foreign country
D)dollars; United States
Q3) Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Q1) Which of the following is an example of economic exposure but not an example of transaction exposure?
A)An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B)An increase in the pound's value increases a U.S. firm's cost of British pound payables.
C)A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
D)A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.
Q2) Even if translation exposure does not affect cash flows, it is a concern of many MNCs.
A)True
B)False
Q3) Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Q1) MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.
A)True
B)False
Q2) The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.
A)True
B)False
Q3) Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the foreign country now if the government of that country:
A)eliminates all quotas.
B)reduces all quotas.
C)increases all quotas.
D)eliminates all tariffs.
Q4) Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Q1) The required rate of return of a project is ____ the MNC's cost of capital.
A)greater than
B)less than
C)the same as
D)any of the above, depending on the specific project
Q2) A U.S.-based MNC has just established a subsidiary in Algeria. Shortly aFter the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.
A)lower
B)increase
C)lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D)increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
E)none of the above
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Chapter 15: International Corporate Governance and Control
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Q1) Acquirers may have different required rates of return because of differences in the local risk-free interest rate.
A)True
B)False
Q2) The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very high and is expected to decrease over time.
A)True
B)False
Q3) Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:
A)the Chinese yuan would depreciate in the future.
B)the Chinese yuan would appreciate in the future.
C)the Chinese yuan would remain somewhat stable in the future.
D)none of the above; the value of the Chinese yuan has no impact on the feasibility of a divestiture.
Q4) At present, U.S. firms acquire more targets in China than in any other country.
A)True
B)False
Page 17
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Chapter 16: Country Risk Analysis
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Q1) To best reduce exposure to a host government takeover, a subsidiary could:
A)use a long-run profit perspective for business in that country.
B)hire people from its own country (where the parent is located).
C)attempt to obtain supplies from its parent for which substitutes are not available.
D)borrow funds from its parent rather than from the host country's creditors.
Q2) 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.
Q3) Adjustments to incorporate country risk into the capital budgeting analysis would involve either the addition of a risk premium to the discount rate or a reduction of the cash flows.
A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) The ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows.
A)lower; higher
B)higher; higher
C)lower; lower
D)none of the above
Q2) In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.
A)more; strong
B)more; weak
C)less; strong
D)less; weak
E)B and C
Q3) Which of the following is least likely to influence an MNC's capital structure?
A)stability of the MNC's cash flows
B)the MNC's credit risk
C)the MNC's access to earnings
D)the MNC's decision to invest excess cash in a Treasury bill rather than in a bank
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Chapter 18: Long-Term Debt Financing
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Q1) A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.
A)stock; one currency
B)stock; a portfolio of foreign currencies
C)one currency; stock options
D)one currency; another currency
Q2) Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries are ____.
A)low; high
B)high; low
C)high; high
D)none of the above
Q3) An MNC may be tempted to finance with a maturity that is less than the expected life of the project when the yield curve is: A)flat.
B)inverted.
C)upward sloping.
D)downward sloping.
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Chapter 19: Financing International Trade
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Q1) Which of the following is not true regarding letters of credit?
A)A letter of credit is a written commitment by the importer's bank on the importer's behalf promising to pay the exporter when it presents documents showing that the products have been shipped.
B)The letters of credit used in international trade are irrevocable.
C)Letters of credit guarantee that the products shipped are the products purchased.
D)All of the above are true.
Q2) There is an active secondary market for banker's acceptances.
A)True
B)False
Q3) The Working Capital Guarantee Program is administered by the:
A)Private Export Funding Corporation (PEFCO).
B)Overseas Private Investment Corporation (OPIC).
C)Ex-Im Bank.
D)Foreign Credit Insurance Association (FCIA).
Q4) The all-in rate a bank charges for a banker's acceptance includes both the interest rate and the acceptance commission.
A)True
B)False
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Chapter 20: Short-Term Financing
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Q1) Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7 percent. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and the MNC needs $____ to repay the loan.
A)375,000; 449,400
B)449,400; 375,000
C)6,000,000; 5,357,143
D)5,357,143; 6,000,000
Q2) If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
A)lower than B)greater than C)similar to D)none of the above
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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Q1) The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about:
A)9 percent.
B)7 percent.
C)4 percent.
D)2 percent.
Q2) Assume Scarlett Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 percent. At the time the loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha in one year is $.00056, the dollar amount initially invested in Zambia is $____, and $____ are paid out aFter one year.
A)1,500; 1,526
B)1,526; 1,500
C)1,500; 1,400
D)1,400; 1,500
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Page 23