International Financial Management
Chapter Exam Questions
Course Introduction
International Financial Management explores the principles and practices of managing financial resources in a global context. The course covers topics such as foreign exchange markets, international financial institutions, cross-border investments, currency risk management, and international capital budgeting. Through the study of real-world cases and analytical tools, students learn how multinational corporations make financing and investment decisions in diverse economic and regulatory environments. Emphasis is placed on understanding how globalization, exchange rate fluctuations, and political risks impact financial strategies and the value of firms operating internationally.
Recommended Textbook
International Financial Management 8th Edition by Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) The imperfect markets theory states that factors of production are somewhat immobile,allowing firms to capitalize on a foreign country's resources.
A)True
B)False
Answer: True
Q2) With regard to corporate goals,an MNC is mostly concerned with maximizing ____________,and a purely domestic firm is mostly concerned with maximizing ____________.
A) shareholder wealth;short term earnings
B) shareholder wealth;shareholder wealth
C) short term earnings;sales volume
D) short term earnings;shareholder wealth
Answer: B
Q3) _____________ are most commonly classified as a direct foreign investment.
A) Foreign acquisitions
B) Purchases of international stocks
C) Licensing agreements
D) Exporting transactions
Answer: A
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Chapter 2: International Flow of Funds
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Q1) As a result of the European Union,restrictions on exports between _______ were reduced or eliminated.
A) member countries and the U.S.
B) member countries
C) member countries and European non-members
D) none of the above
Answer: B
Q2) Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account.
A)True
B)False
Answer: True
Q3) A tariff is a maximum limit on imports.
A)True
B)False
Answer: False
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Page 4
Chapter 3: International Financial Markets
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Sample Questions
Q1) International money market transactions normally represent:
A) the equivalent of $1 million or more.
B) the equivalent of $1,000 to $10,000.
C) the equivalent of between $10,000 and $100,000.
D) the equivalent of between $100,000 and $200,000.
Answer: A
Q2) A Japanese yen is worth $.0080,and a Fijian dollar (F$)is worth $.5900.What is the value of the yen in Fijian dollars (i.e.,how many Fijian dollars do you need to buy a yen)
A) 73.75.
B) 125.
C) 1.69.
D) 0.014.
E) none of the above
Answer: D
Q3) The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) When the "real" interest rate is relatively low in a given country,then the currency of that country is typically expected to be:
A) weak, since the country's quoted interest rate would be high relative to the inflation rate.
B) strong, since the country's quoted interest rate would be low relative to the inflation rate.
C) strong, since the country's quoted interest rate would be high relative to the inflation rate.
D) weak, since the country's quoted interest rate would be low relative to the inflation rate.
Q2) The value of the Australian dollar (A$)today is $0.73.Yesterday,the value of the Australian dollar was $0.69.The Australian dollar ________ by _______%.
A) depreciated;5.80
B) depreciated;4.00
C) appreciated;5.80
D) appreciated;4.00
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Chapter 5: Currency Derivatives
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Q1) Both call and put option premiums are affected by the level of the existing spot price relative to the strike price;for example,a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.
A)True
B)False
Q2) Which of the following are true regarding the options markets
A) Hedgers and speculators both attempt to lower risk.
B) Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C) Hedgers and speculators are both necessary in order for the market to be liquid.
D) all of the above
Q3) The shorter the time to the expiration date for a currency,the _______ will be the premium of a call option,and the _______ will be the premium of a put option,other things equal.
A) greater;greater
B) greater;lower
C) lower;lower
D) lower;greater
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Chapter 6: Government Influence on Exchange Rates
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Q1) Under a managed float exchange rate system,the Fed may attempt to stimulate the U.S.economy by _______ the dollar. Such an adjustment in the dollar's value should _______ the U.S.demand for products produced by major foreign countries.
A) weakening;increase B) weakening;decrease C) strengthening;increase D) strengthening;decrease
Q2) A weaker dollar places _______ pressure on U.S.inflation,which in turn places _______ pressure on U.S.interest rates,which places _______ pressure on U.S.bond prices.
A) upward;downward;upward
B) upward;downward;downward
C) upward;upward;downward
D) downward;upward;upward
E) downward;downward;upward
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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Page 8
Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) Based on interest rate parity,the larger the degree by which the foreign interest rate exceeds the U.S.interest rate,the:
A) larger will be the forward discount of the foreign currency.
B) larger will be the forward premium of the foreign currency.
C) smaller will be the forward premium of the foreign currency.
D) smaller will be the forward discount of the foreign currency.
Q2) Assume the British pound is worth $1.60,and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds
A) 2.0.
B) 2.40.
C) .80.
D) .50.
E) none of the above
Q3) When using _______,funds are not tied up for any length of time.
A) covered interest arbitrage
B) locational arbitrage
C) triangular arbitrage
D) B and C
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Chapter 8: Relationships among Inflation,Interest Rates,and Exchange Rates
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Sample Questions
Q1) If interest rate parity holds,then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.
A) greater than B) less than
C) equal to
D) answer is dependent on whether the forward rate has a discount or premium
Q2) Latin American countries have historically experienced relatively high inflation,and their currencies have weakened.This information is somewhat consistent with the concept of:
A) interest rate parity.
B) locational arbitrage.
C) purchasing power parity.
D) the exchange rate mechanism.
Q3) According to the IFE,if British interest rates exceed U.S.interest rates:
A) the British pound's value will remain constant.
B) the British pound will depreciate against the dollar.
C) the British inflation rate will decrease.
D) the forward rate of the British pound will contain a premium.
Page 10
E) today's forward rate of the British pound will equal today's spot rate.
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Chapter 9: Forecasting Exchange Rates
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Q1) Assume that interest rate parity holds. The U.S.fiveyear interest rate is 5% annualized,and the Mexican fiveyear interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate fiveyear forecast of the peso's spot rate if the fiveyear forward rate is used as a forecast
A) $.131.
B) $.226.
C) $.262.
D) $.140.
E) $.174.
Q2) Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate's implied standard deviation from the currency option pricing model.
A)True
B)False
Q3) If foreign exchange markets are strong-form efficient,then all relevant public and private information is already reflected in today's exchange rates.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) If the U.S.dollar appreciates:
A) an MNC's U.S. sales will probably decrease.
B) an MNC's exports denominated in U.S. dollars will probably increase.
C) an MNC's interest owed on foreign funds borrowed will probably increase.
D) an MNC's exports denominated in foreign currencies will probably increase.
E) all of the above
Q2) ___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.
A) Transaction
B) Economic
C) Translation
D) None of the above
Q3) A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
A)True
B)False
Q4) A reduction in hedging will probably reduce transaction exposure.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) If interest rate parity exists,and transaction costs do not exist,the money market hedge will yield the same result as the ___________ hedge.
A) put option
B) forward
C) call option
D) none of the above
Q2) The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.
A)True
B)False
Q3) Which of the following reflects a hedge of net payables on British pounds by a U.S.firm
A) purchase a currency put option in British pounds.
B) sell pounds forward.
C) sell a currency call option in British pounds.
D) borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
E) A and B
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Q1) Wisconsin Inc.conducts business in Zambia.Years ago,Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha.Wisconsin wishes to restructure its operations to reduce economic exposure.Which of the following is not a feasible way of accomplishing this A) increase Zambian supply orders.
B) increase Zambian sales.
C) restructure debt to increase debt payments in Zambia.
D) reduce Zambian sales.
Q2) Springfield Co.,based in the U.S.,has a cost of goods sold attributable to foreign material orders that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would _______ a stronger dollar and would _______ a weaker dollar.
A) benefit from;be unaffected by B) benefit from;be adversely affected by C) be unaffected by;be adversely affected by D) be unaffected by;benefit from E) benefit from;benefit from
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Page 14
Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) ____________ 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
Q2) To fully benefit from economies of scale,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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Q1) The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.
A)True
B)False
Q2) As the financing of a foreign project by the parent _______ relative to the financing provided by the subsidiary,the parent's exchange rate exposure _________.
A) increases;decreases
B) decreases;increases
C) increases;increases
D) none of the above
Q3) An international project's NPV is _________ related to consumer demand and _________ related to the project's salvage value.
A) positively;positively
B) positive;negatively
C) negatively;positively
D) negatively;negatively
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Chapter 15: Multinational Restructuring
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Q1) Most countries discourage hostile takeovers.
A)True
B)False
Q2) Which of the following types of international restructuring is probably the most difficult to value by an MNC
A) international acquisition.
B) newly privatized foreign business.
C) international alliance.
D) international divestiture.
Q3) Which of the following factors is least likely to cause the required rate of return to vary among MNCs assessing the same foreign target
A) differences in the timing of remittances from the target to the parent.
B) differences in the desired use of the target.
C) differences in the local risk-free interest rate.
D) differences in the ability to use financial leverage.
Q4) Privatization involves the sale of previously government-owned businesses by the government.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Q1) Which of the following is not a strategy that could be used by an MNC to reduce its exposure to a host government takeover
A) attempt to recover cash flows from a foreign investment as quickly as possible.
B) rely on unique supplies and/or technology.
C) hire local labor.
D) borrow local funds.
E) all of the above are strategies to reduce an MNC's exposure to a host government takeover.
Q2) After a project is accepted and implemented,country risk does not need to be monitored;since the project is already established,no further changes can be made. A)True
B)False
Q3) A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry. A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) Other things being equal,countries with relatively _______ populations and _______ inflation are more likely to have a low cost of capital.
A) young;high
B) old;high
C) old;low
D) young;low
Q2) According to the text,MNCs:
A) use only debt financing in foreign countries to support foreign subsidiaries.
B) use only equity financing in foreign countries to support foreign subsidiaries.
C) use only parent financing in foreign countries to support foreign subsidiaries.
D) none of the above
Q3) 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
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Chapter 18: Long-Term Financing
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Q1) Because bonds denominated in foreign currencies rarely have lower yields,U.S.corporations rarely consider issuing bonds denominated in those currencies.
A)True
B)False
Q2) U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary's local currency.
A)True
B)False
Q3) The United States typically has a(n)___________-sloping yield curve,which means that the annualized yields are ________ for short-term debt than for long-term debt.
A) downward;higher
B) downward;lower
C) upward;higher
D) upward;lower
Q4) Eurobonds are often issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
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Chapter 19: Financing International Trade
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Q1) In _______,a bank arranges to fund a loan to pay the exporter instead of charging the importer's account immediately.
A) refinancing of a sight letter of credit
B) a banker's acceptance
C) a short term bank loan
D) accounts receivable financing
Q2) The ______________ is a self-sustaining federal agency responsible for insuring direct U.S.investments in foreign countries against the risk of currency inconvertibility,expropriation,and other political risks.
A) Export-Import Bank of the United States
B) Private Export Funding Corporation
C) Overseas Private Investment Corporation
D) none of the above
Q3) The Working Capital Guarantee Program is administered by the:
A) Private Export Funding Corporation (PEFCO).
B) Overseas Private Investment Corporation (OPIC).
C) Ex-Imbank.
D) Foreign Credit Insurance Association (FCIA).
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21
Chapter 20: Short-Term Financing
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Q1) What is the expected effective financing rate of the portfolio Martha is contemplating (assume the two currencies move independently from one another)
A) 9.03%.
B) 7.00%.
C) 10.00%.
D) 7.59%.
E) none of the above
Q2) If interest rate parity exists,transactions costs are zero,and the forward rate is an accurate predictor of the future spot rate,then the effective financing rate on a foreign currency:
A) would be equal to the U.S. interest rate.
B) would be less than the U.S. interest rate.
C) would be more than the U.S. financing rate.
D) would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.
Q3) The interest rate of euronotes is based on the T-bill rate.
A)True
B)False
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Chapter 21: International Cash Management
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Q1) Generally,if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate,then the international Fisher effect will also hold.
A)True
B)False
Q2) The international Fisher effect suggests that:
A) the effective yield on short term foreign securities should, on average, equal the yield on short term domestic securities.
B) the effective yield on short term securities of high inflation countries is greater than the yield on short term domestic securities.
C) if domestic income grows faster than foreign income, the effective yield on short term foreign securities is higher than short term domestic securities.
D) if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.
Q3) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True B)False
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