International Financial Management Practice Exam
Course Introduction
International Financial Management explores the financial decision-making processes and challenges faced by multinational corporations operating in a global environment. The course covers topics such as foreign exchange markets, international capital budgeting, risk management techniques, hedging strategies, international financial markets and instruments, and cross-border investment analysis. Students will develop analytical skills to assess exchange rate risk, evaluate international funding sources, and understand the impact of global economic and financial factors on firm value. Emphasis is placed on strategic financial planning and techniques relevant for firms engaged in international business.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) The acquisition of a foreign subsidiary is commonly considered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size.
A)True
B)False
Answer: False
Q2) Which of the following is not mentioned in the text as an additional risk resulting from international business?
A) exchange rate fluctuations.
B) political risk.
C) interest rate risk.
D) exposure to foreign economies.
Answer: C
Q3) If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.
A)True
B)False
Answer: False
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.
A)True
B)False
Answer: True
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) According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.
A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase
Answer: A
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4
Chapter 3: International Financial Markets
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Sample Questions
Q1) According to the text, the forward rate is commonly used for:
A) hedging.
B) immediate transactions.
C) previous transactions.
D) bond transactions.
Answer: A
Q2) The U.S. dollar is not ever used as a medium of exchange in:
A) industrialized countries outside the U.S.
B) in any Latin American countries.
C) in Eastern European countries where foreign exchange restrictions exist.
D) none of the above
Answer: D
Q3) In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
A) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
E) U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
Q2) Liquidity of a currency can affect the extent to which speculation can impact the currency's value.
A)True
B)False
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6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) When a currency call option is classified as "in the money," this indicates that
A) the spot rate of the currency is less than the exercise price of the option.
B) the spot rate of the currency is greater than the exercise price of the option.
C) the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
D) the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.
Q2) Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.
A) premium; about 6%
B) discount; about 6%
C) discount; about 6.45%
D) premium; about 6.45%
Q3) Due to put-call parity, we can use the same formula to price calls and puts.
A)True
B)False
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Page 7
Chapter 6: Government Influence on Exchange Rates
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Sample Questions
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) Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would
A) buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
B) buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
C) sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
D) sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
E) none of the above
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume the following information:
You have $400,000 to invest:
\[\begin{array}{l}
\text { You have } \$ 400,000 \text { to invest: }\\
\begin{array} { l l r }
\text { Current spot rate of Sudanese dinar (SDD) } & = & \$ .00570 \\
\text { 90-day forward rate of the dinar } & = & \$ .00569 \\
\text { 90-day interest rate in the U.S. } & = & 4.0 \% \\
\text { 90-day interest rate in Sudan } & = & 4.2 \%
\end{array}
\end{array}\]
If you conduct covered interest arbitrage, what amount will you have after 90 days?
A) $416,000.00.
B) $416,800.00.
C) $424,242.86.
D) $416,068.77.
E) none of the above
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
A)True
B)False
Q2) According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
A) follows their exchange rate movement.
B) is due to their inflation differentials.
C) is zero.
D) is constant over time.
E) C and D
Q3) Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.
A)True B)False
Q4) If purchasing power parity holds, then the Fisher effect must also hold.
A)True B)False
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.
A)True
B)False
Q2) Which of the following is not a forecasting technique mentioned in your text?
A) Accounting-based forecasting
B) Technical forecasting
C) Fundamental forecasting
D) Market-based forecasting
E) Mixed forecasting
Q3) Foreign exchange markets are generally found to be at least ____ efficient.
A) weak-form
B) semistrong-form
C) strong form
D) none of the above
Q4) A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) The VAR method presumes that the distribution of exchange rate movements is normal.
A)True
B)False
Q2) Firms with more foreign costs than foreign revenues will generally be favorably affected by a stronger foreign currency.
A)True
B)False
Q3) Economic exposure refers to:
A) the exposure of a firm's international contractual transactions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transactions between foreign exchange traders.
C) the exposure of a firm's financial statements to exchange rate fluctuations.
D) the exposure of a firm's cash flows to exchange rate fluctuations.
E) the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
A)True
B)False
Q2) In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
A) highly positive.
B) highly negative.
C) zero.
D) none of the above
Q3) A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.
A) forward; small
B) futures; large
C) forward; large
D) none of the above
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13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:
A) purchase Canadian supplies.
B) increase its borrowings in U.S.
C) decrease prices on Canadian goods.
D) decrease its borrowed funds in Canada.
Q2) When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility in restructuring operations is to reduce foreign sales.
A)True
B)False
Q3) The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
A)True
B)False
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Page 14
Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) The ____ a project's variability in cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
Q2) ____ is not a cost-related motive for direct foreign investment (DFI).
A) Using foreign factors of production
B) Using foreign raw materials
C) Using foreign technology
D) Reacting to trade restrictions
E) Fully benefiting from economies of scale
Q3) In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered.
A)True
B)False
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.
A) withholding taxes
B) excise taxes
C) tax credits
D) carryforwards
Q2) Assuming that a subsidiary is wholly owned, a subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.
A)True
B)False
Q3) Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.
A) higher; lower
B) higher; higher
C) lower; higher
D) none of the above
Q4) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) 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.
Q2) The valuation of a proposed international divestiture can be determined by comparing the present value of the cash flows if the project is continued to the proceeds that would be received (after taxes) if the project is divested.
A)True
B)False
Q3) The value of an MNC (from the parent's perspective) is independent of the MNC's desired scheduling of remitted funds from the target.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant.
A)True
B)False
Q2) According to the text, country risk analysis has:
A) almost always detected problems before they occur.
B) been effectively used in place of capital budgeting to determine whether a project should be accepted.
C) been perfected as a result of the development of discriminant analysis.
D) none of the above
Q3) Which of the following is not a way in which country risk analysis can be used?
A) to monitor countries where an MNC is currently doing business.
B) as a screening device to avoid conducting business in countries with excessive risk.
C) to revise an MNC's financing decisions.
D) to determine the degree to which the MNC is exposed to exchange rate movements.
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.
A)True
B)False
Q2) If an MNC's cash flows are more stable, it can probably handle more debt than an MNC with erratic cash flows.
A)True
B)False
Q3) When assuming that investors in the U.S. are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.
A)True
B)False
Q4) According to the text, the cost of capital for an international project will:
A) always be greater than the firm's cost of capital.
B) always be less than the firm's cost of capital.
C) always be the same as the firm's cost of capital.
D) none of the above
Page 19
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) When an MNC needs to finance a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to:
A) apply a required return that is based on the CAPM.
B) apply a required return based on unsystematic risk.
C) derive the net present value of the equity investment.
D) apply the required return equal to the risk-free rate in the foreign country.
Q2) In a(n) ____ swap, the notional value is reduced over time.
A) accretion
B) amortizing
C) forward
D) zero-coupon
E) putable
Q3) ____ are commonly used to hedge interest rate risk.
A) Currency swaps
B) Parallel loans
C) Interest rate swaps
D) Forward contracts
E) None of the above
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Chapter 19: Financing International Trade
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Sample Questions
Q1) The payment method that affords the supplier the greatest degree of protection is the prepayment method.
A)True
B)False
Q2) A ____ provides a summary of freight charges and conveys title to the merchandise.
A) letter of credit
B) banker's acceptance
C) bill of lading
D) bill of exchange
Q3) A draft drawn on and accepted by a bank is called a banker's acceptance.
A)True
B)False
Q4) The term counterpurchase denotes the exchange of goods between two parties under two distinct contracts expressed in monetary terms.
A)True
B)False
Q5) There is an active secondary market for banker's acceptances.
A)True
B)False
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).
A)True
B)False
Q2) A negative effective financing rate for a U.S. firm implies that the firm:
A) will incur a loss on the project financed with the funds.
B) paid more interest on the funds than what it would have paid if it had borrowed dollars.
C) will be unable to repay the loan.
D) none of the above
Q3) Kushter Inc. would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter's effective financing rate next year?
A) 1.92%
B) 2.00%
C) 6.08%
D) none of the above
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Chapter 21: International Cash Management
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Sample Questions
Q1) Refer to Exhibit 21-1. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?
A) 6.47%.
B) 8.84%.
C) 8.50%.
D) none of the above
Q2) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True
B)False
Q3) Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?
A) 2.50%.
B) 2.60%.
C) 2.40%.
D) none of the above
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