International Financial Management
Midterm Exam
Course Introduction
International Financial Management explores the principles and practices involved in financial decision-making by multinational corporations operating in a global environment. The course covers topics such as foreign exchange markets, international monetary systems, exchange rate risk management, international capital budgeting, global financing strategies, and the impact of political and economic risks on cross-border operations. Students learn how to analyze and manage financial challenges unique to international business, including currency exposure and international portfolio diversification, equipping them with the skills necessary to make informed financial decisions on a global scale.
Recommended Textbook
International Financial Management Canadian Perspectives 2nd Edition by Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) If people in both countries eat the same dish that requires 0.1kg or tomatoes and 1.4kg of potatoes to prepare,and the price of potatoes is $1000 per ton,what is the GDP in Byelorussia?
A)$165,000
B)$333,333
C)$1,000,000
D)None of these
Answer: C
Q2) Country A can produce 10 yards of textiles and 6 pounds of food per unit of input.Country B can produce 8 yards of textiles and 5 pounds of food per unit of input.
A)Country A is relatively more efficient than Country B in the production of textiles
B)Country B is relatively more efficient than Country A in the production of food
C)Country A has an absolute advantage over Country B in the production of food and textiles
D)All of these
Answer: D
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3
Chapter 2: International Monetary System
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Q1) It is said that the gold-system was programmed to collapse in the long run.To satisfy the growing need for reserves,the United States had to run balance-of-payments deficits continuously.Yet,if the United States ran perennial balance-of-payments deficits,if would eventually impair the public confidence in the dollar.This dilemma I known as the
A)Triffin paradox
B)Triffin dilemma
C)Mundell paradox
D)Mundell dilemma
Answer: A
Q2) Before World War I,GBP 2.2474 was needed to buy one ounce of gold.FF 310.00 would also buy one ounce of gold.What was the exchange rate between the French franc and the British Pound?
Answer: FF310/GBP2.2474 = FF137.9372/GBP
Q3) Which of the following is a cost of a Monetary Union:
A)Loss of national monetary policy independence
B)Loss of exchange rate uncertainty
C)Increased transaction costs
D)Loss of efficiency
Answer: A
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Chapter 3: Balance of Payments
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Q1) Foreign direct investment (FDI)occurs:
A)when an investor acquires a measure of control of a foreign business
B)when an investor buys foreign bonds directly
C)with sales and purchases of foreign stocks and bonds that do not involve a transfer of control
D)when a company buys foreign government bonds directly
Answer: A
Q2) The reserve account of the Balance of Payments records:
A)the stock of foreign exchange held by the government
B)changes in foreign exchange reserves held by the government
C)the stock of gold held by foreign governments
D)changes in foreign exchange reserves held by foreign governments
Answer: B
Q3) Which of the following is true under a pure flexible exchange rate regime?
A)Balance of current account + Balance of capital account > 0
B)Balance of current account + Balance of capital account < 0
C)Balance of current account + Balance of capital account = 0
D)There is insufficient information to warrant any of the above answers
Answer: C
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) The SF/$ spot exchange rate is 1.25 and the 180 forward exchange rate is 1.30.The forward premium (discount)is:
A)The dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days.
B)The dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days.
C)The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
D)The dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days.
Q2) Participants in the interbank foreign exchange markets include the following except:
A)international banks
B)foreign exchange brokers
C)nonbank dealers
D)credit unions
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6
Chapter 5: The Market for Foreign Exchange
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Q1) Uncovered interest rate parity
A)is an arbitrage condition
B)holds most of the time
C)is based on expectations
D)will provide guaranteed but small profits
Q2) PPP does not hold well because of the following except
A)barriers to international commodity arbitrage
B)the existence of non-tradables
C)commodity prices are different in different countries
D)the CPI index is calculated using the same basket of goods
Q3) The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.The real interest rate is 3% in Great Britain.Assume that the parity conditions hold.
a)What is the nominal interest rate in Switzerland?
b)What is the nine-month forward rate of the Swiss franc with respect to the British pound?
c)If the inflation rates are expected to stay unchanged over the next two years,what is the expected spot exchange rate between the British pound and the Swiss franc in two years?
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Page 7
Chapter 6: International Parity Relationships and Forecasting Foreign
Exchange Rates
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Q1) ABC Bank (seller)has made a "three against six" Forward Rate Agreement (FRA),with XYZ Bank (buyer)with a notional amount of $1,000,000.The settlement and agreement rates are 6% and 5% respectively.There are 91 actual days in the three-month agreement period.
a)When is this agreement settled?
b)Who pays whom?
c)What is the dollar amount of the settlement?
Q2) Japanese yen deposited in U.S.bank are called
A)Americoyen
B)Dollaroyen
C)Euroyen
D)Worldyen
Q3) Short-term unsecured promissory notes issued by a corporation or a bank and placed directly with the investment public through a dealer are called
A)eurocredits
B)eurocommercial papers
C)euro facilities
D)euronotes
Q4) Explain Eurocommerical papers.
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) ABC Corporation,a Canadian firm,wants to float a bond issue in the United Kingdom.Which choices does the company have?
Discuss the main characteristics of each option.What do you recommend?
Q2) A "bearer bond" is one that
A)shows the owner's name on the bond
B)the owner's name is recorded by the issuer
C)possession is evidence of ownership
D)a and b
Q3) Taxes on interest paid by nonresidents are called
A)interest taxes
B)non-resident taxes
C)non-resident interest taxes
D)withholding taxes
Q4) ZZZ Corp.wants to issue zero-coupon bonds with a 10-year maturity.The implied yield to maturity on these bonds is 5% and ZZZ Corp.wants to raise $10,000,000.(Assume no transaction costs).How much money will ZZZ Corp.have to pay at maturity of the bond?
Q5) What happens to the present value of the bonds in 4.,if the implied yield to maturity increases by 1%?
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Chapter 8: Management of Transaction Exposure
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Q1) If the Rolls Royce ADRs were trading at $5.75 when the underlying shares were trading in London at £0.875,ignoring transaction costs,the arbitrage trading profit would be:
A)$0.00
B)$1.12
C)$2.12
D)$3.12
Q2) American Depository Receipt (ADRs)represent foreign stocks
A)denominated in U.S.dollars that trade on European stock exchanges
B)denominated in U.S.dollars that trade on a U.S.stock exchange
C)denominated in a foreign currency that trade on a U.S.stock exchange
D)non-registered (bearer) securities
Q3) A measure of "liquidity" for a stock market is
A)the turnover ratio
B)the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market
C)the LIBOR rate
D)a and b
Q4) What factors go into the decision to cross-list on a foreign exchange?
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Chapter 9: Management of Economic Exposure
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Q1) In reference to the derivatives market,a "hedger"
A)attempts to profit from a change in the futures price
B)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position C)plays a zero-sum game
D)b and c
Q2) Eurodollar interest rate futures contracts have all of the following characteristics except:
A)The futures contract is written on a hypothetical $1,000,000 180-day deposit of Eurodollars.
B)No actual delivery of Eurodollars takes place.
C)The contracts are made out many years into the future.
D)The contracts are widely used.
Q3) In the absence of transactions costs,for the same maturity and currency
A)The futures price is always higher than the forward rate
B)The forward rate is always higher than the futures price
C)The futures price and the forward rate are the same
D)The futures price and the forward rate are not related
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11
Chapter 10: Management of Translation Exposure
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Q1) What will be the annual GROSS interest payment of firm A to the swap bank? (where "GROSS" means that it does not take into account the payment made by the swap bank to firm A on the loan that firm A made to the swap bank)
A)£66,000
B)£76,000
C)$72,000
D)$216,000
Q2) Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:
A)fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating-rate debt obligations for fixed-rate interest payments of the other counter party
B)fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency
C)a and b
D)none of these
Q3) The following information is given:
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Chapter 11: International Banking and Money Market
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Q1) Gains from portfolio diversification are largest when
A)The securities are perfectly positively correlated
B)The securities are not correlated
C)The securities are perfectly negatively correlated
D)Need more information
Q2) In May 2003 when the exchange rate was Yen 110/$,Nissan Motor Company invested ¥1,100,000,000 in pure-discount U.S.bonds and liquidated the investment one year later when the exchange rate was Yen 105/$.The Yen rate of return earned on this investment was 10%.
a)Calculate the dollar amount that the bonds were sold at.
b)Calculate the dollar rate of return of this investment.
Q3) Which of the following characterizes international investor behaviour?
A)Investors are fully diversified
B)Investors hold optimal international portfolios
C)Investors show a home bias in their portfolio holdings
D)Investors don't invest in international stocks
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13
Chapter 12: International Bond Market
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Q1) The extend to which the value of the firm is affected by unanticipated changes in exchange rates is called
A)economic exposure
B)operating exposure
C)transaction exposure
D)translation exposure
Q2) Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.4/euro,all else equal?
Q3) How can operating exposure be managed?
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Chapter 13: International Equity Markets
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Q1) Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is false?
A)If the spot rate is greater than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
B)If the spot rate is less than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
C)If the spot rate is equal to the forward rate at maturity, Encana is better off with the hedge than without the hedge.
D)Need more information
Q2) Which of the following is not an operational hedge?
A)Invoice currency selection
B)Lead/lag strategy
C)Exposure netting
D)Money market hedge
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Chapter 14: Interest Rate and Currency Swaps
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Q1) XYZ Corporation,a Canadian parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service to the local market. Assume that:
1)the functional currency of ABC is the pound
2)the reporting currency is the dollar
3)the initial exchange rate $1.00 = £ 0.67
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $300,000 in the affiliate.Under CICA 1650,the intercompany debt and investment will appear on the consolidated balance sheet as:
A)£200,000
B)$201,493
C)$298,507
D)none of these
Q2) Which of the above statements pertain to self-sustaining foreign operations?
A)(i)
B)(i) and (ii)
C)(iii) and (iv)
D)(i), (ii), and (iii)
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Page 16
Chapter 15: International Portfolio Investment
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Q1) Synergistic gains refer to:
A)gains from hedging
B)gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firms
C)gains arising if the combined companies can save on the costs of production, marketing, distribution, and R&D
D)b and c
Q2) Control risk refers to the risk which arises from the uncertainty about:
A)the host's country's policies affecting the local operations of an MNC
B)the host's country's policy regarding ownership and control of local operations
C)cross-border flows of capital, payment, know-how, and the like
D)none of these
Q3) The most important mode of entering a foreign market via FDI in the last few years is
A)Greenfield investments
B)Brownfield investments
C)Mergers & acquisitions
D)All modes are equally important
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%.
A)28%
B)38%
C)46%
D)50%
Q2) Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the systematic risk inherent in the stock of ABC Corporation is 1.80,using the Capital Asset Pricing Model (CAPM)calculate the expected return of ABC.
A)14.0%
B)14.8%
C)16.0%
D)16.8%
Q3) If ABC's debt-to-equity ratio is 1: 1,then its weighted average cost of capital,K,is:
A)5%
B)5.75%
C)6.75%
D)10%
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Company Y,a Canadian manufacturer of boats,is currently exporting $100,000 worth of boats to the United States.The firm is considering opening a production facility in the United States because without a presence in the United States,the entire US market would be lost to a competitor.The new facility would produce boats for about $800,000 and the firm anticipates total sales in the United States to be $900,000.When analyzing this project,Company X should:
A)ignore the exports of $100,000 since they are not an incremental cash flow from the project
B)ignore the exports of $100,000 since they are not part of the project
C)include $100,000 as lost export sales in the capital budget
D)none of these
Q2) The "net present value" of a capital project is calculated by using:
A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)
Q3) Which cash flows are relevant for the international capital budgeting analysis?
Q4) Is it possible that a project has a positive APV from the subsidiary's perspective and a negative APV from the parent's perspective?
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Chapter 18: International Capital Budgeting
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Q1) Unexpected Funds blockage is a
A)Credit risk
B)Unavoidable risk
C)Unlikely risk
D)Political risk
Q2) Using the national airlines of the host country that has enforced exchange rate controls is an example of
A)Direct negotiation
B)Export creation
C)Blocked funds
D)Creative thinking
Q3) If the transfer price is $8,000,what is the income tax paid in the United States?
A)300
B)400
C)700
D)1,000
Q4) Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?
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Page 20
Chapter 19: Multinational Cash Management
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Q1) The time from acceptance to maturity on a banker's acceptance (B/A)is 90 days,the importing bank's acceptance commission is 1 percent and the B/A's discounted value at the time of acceptance is $1,000,000.If the 90-day B/A rates are 5%,determine the amount the exporter will receive if he holds the B/A until maturity.
Q2) International trade is more difficult and risky from the exporter's perspective than is domestic trade because:
A)the exporter may not be familiar with the buyer, and thus not know if the importer is a good credit risk
B)if the merchandise is exported abroad and the buyer does not pay, it may prove difficult, if not impossible, for the exporter to have any legal recourse
C)political instability makes it risky to ship merchandise abroad certain to parts of the world
D)all of these
Q3) Which forms of countertrade do not involve the use of money?
A)Barter, switch trading, buyback
B)Barter, clearing arrangement, switch trading
C)Buy-back, switch trading, counterpurchase
D)Buy-back, counterpurchase, offset
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21
Chapter 20: International Trade Finance
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Q1) Value-added tax (VAT)is:
A)a direct national tax levied on the value added in the production of a good (or service) as it moves through various stages of production
B)an indirect national tax levied on the value added in the production of a good (or service) as it moves through various stages of production
C)the equivalent of imposing a national sales tax
D)b and c
Q2) To tax national residents of a country on their worldwide income is called
A)worldwide or residential taxation
B)worldwide or source taxation
C)territorial or residential taxation
D)territorial or source taxation
Q3) What are the major ways in which countries levy taxes?
Q4) How can double taxation result out of the two major ways to determine who has to pay taxes?
Q5) A product sells for EUYR 1,6000 in the first production stage,EUR2,000 the second and EUR2,700 in the third and last production stage.If the value-added tax (VAT)rate is 20%,what would be the incremental VAT at each state of production?
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Debt may be beneficial for the following reasons except:
A)because it reduces free cash flows
B)because of its disciplinary effect on managers
C)because the interest payments benefit shareholders
D)because interest has to be paid to avoid bankruptcy
Q2) The main weakness of the 'public corporation' is
A)too many shareholders, which makes it difficult to make corporate decision.
B)relatively high corporate income tax rates.
C)conflicts of interest between managers and shareholders.
D)conflicts of interests between shareholders and bondholders.
Q3) Discuss the concept of "private benefits of corporate control".
Q4) Discuss the major advantage and key weakness of a public corporation.
Q5) Free cash flows refer to
A)a firm's cash reserve in excess of tax obligation.
B)a firm's funds in excess of what's needed for undertaking all profitable projects.
C)a firm's cash reserve in excess of interest and tax payments.
D)a firm's income tax refund that is due to interest payments on borrowing.
Q6) Explain the agency problem and how it can be remedied.
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Q7) How can listing overseas benefit the corporate governance of a public company?