International Financial Management Review
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Course Introduction
International Financial Management explores the financial decision-making processes of multinational corporations operating within the global marketplace. The course covers key topics such as foreign exchange markets, international financial instruments, risk management strategies, cross-border investment decisions, and sources of international financing. Students gain a comprehensive understanding of how economic, political, and cultural factors impact international financial operations and learn to analyze and implement strategies to manage risks and maximize value in a dynamic, global financial environment.
Recommended Textbook
Multinational Business Finance 12th Edition by Arthur I. Stonehill
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Chapter 1: Globalization and the Multinational Enterprise
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Q1) Of the following, which would NOT be considered a way that government interferes with comparative advantage?
A)Tariffs.
B)Managerial skills.
C)Quotas.
D)Other non-tariff restrictions.
Answer: B
Q2) A well-established, large, Brazil-based MNE will probably be most adversely affected by which of the following elements of firm value?
A)An open marketplace.
B)High-quality strategic management.
C)Access to capital.
D)Access to qualified labor pool.
Answer: C
Q3) International trade might have approached the comparative advantage model in the 19th century, and it does so even more today.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Goals and Corporate Governance
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Sample Questions
Q1) The primary operational goal for the firm is to
A)maximize after-tax profits in each country where the firm is operating.
B)minimize the total financial risk to the firm.
C)maximize the consolidated after-tax profits of the firm.
D)maximize the total risk to the firm.
Answer: C
Q2) Unsystematic risk can be defined as
A)the total risk to the firm.
B)the risk of the individual security.
C)the added risk that a firm's shares bring to a diversified portfolio.
D)the risk of the market in general.
Answer: B
Q3) Which of the following is NOT commonly associated with a government affiliated form of corporate governance regime?
A)No minority influence.
B)Lack of transparency.
C)State ownership of enterprise.
D)All are associated with this type of corporate governance regime.
Answer: D
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Chapter 3: The International Monetary System
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Sample Questions
Q1) Another name for the International Bank for Reconstruction and Development is
A)the Recon Bank
B)the European Monetary System
C)the Marshall Plan
D)the World Bank
Answer: D
Q2) In the decade since 2000, the U.S. has experienced its largest bilateral trade deficits with the countries of China and Japan.
A)True
B)False
Answer: True
Q3) The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as their currency.
A)True
B)False
Answer: False
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Chapter 4: The Balance of Payments
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Q1) Which of the following statements about the balance of payments is NOT true?
A)The BOP is the summary statement of all international transactions between one country and all other countries.
B)The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year.
C)Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows.
D)All of the above are true.
Q2) Over the last two decades the surplus on U.S. services trade has typically been ________ the deficit on U.S. goods trade.
A)greater than
B)equal to C)less than
D)The relationship is constantly shifting from greater than to less than.
Q3) The BOP should always balance.
A)True
B)False
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Chapter 5: Current Multinational Financial Challenges: the Credit
Crisis of 2007-2009
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Q1) Alt-A mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie Mac.
A)True
B)False
Q2) Which of the following is NOT identified by the authors as a "safe-haven" currency?
A)The euro.
B)The British pound.
C)The U.S. dollar.
D)The Japanese yen.
Q3) Credit Default Swaps are highly regulated financial instruments as a result of the Commodity Futures Modernization Act of 2000.
A)True
B)False
Q4) Baring the (hopefully temporary setback of 2008)capital is more mobile today than ever before.
A)True
B)False
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Chapter 6: The Foreign Exchange Market
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Q1) ________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.
A)Dealers; ask; bid
B)Dealers; bid; ask
C)Brokers; ask; bid
D)Brokers; bid; ask
Q2) Which of the following may be participants in the foreign exchange markets?
A)Bank and nonbank foreign exchange dealers.
B)Central banks and treasuries.
C)Speculators and arbitragers.
D)All of the above.
Q3) The authors identify two tiers of foreign exchange markets:
A)bank and nonbank foreign exchange.
B)commercial and investment transactions.
C)interbank and client markets.
D)client and retail market.
Q4) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.
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Chapter 7: International Parity Conditions
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Sample Questions
Q1) One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately ________.
A)$0.96/C$
B)$1/C$1
C)$1.04/C$1
D)relative PPP provides no guide for this type of question
Q2) If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as
A)relative purchasing power parity.
B)interest rate parity.
C)the law of one price.
D)equilibrium.
Q3) Empirical tests prove that PPP is an accurate predictor of future exchange rates.
A)True
B)False
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Chapter 8: Foreign Currency Derivatives
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Q1) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.
A)unlimited; the premium paid.
B)the premium paid; unlimited.
C)unlimited; unlimited.
D)unlimited; the value of the underlying asset.
Q2) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea would earn a higher rate of return by buying yen and a forward contract than if she had invested her money in 6-month US Treasury securities at an annual rate of 2.50%.
A)True
B)False
Q3) Which of the following is NOT a factor in determining the premium price of a currency option?
A)The present spot rate.
B)The time to maturity.
C)The standard deviation of the daily spot price movement.
D)All of the above are factors in determining the premium price.
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Page 10
Chapter 9: Interest Rate and Currency Swaps
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Sample Questions
Q1) An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa)is known as a/an ________.
A)forward rate agreement
B)interest rate future
C)interest rate swap
D)none of the above
Q2) The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could
A)sell an interest rate futures contract of a similar maturity to the loan.
B)buy an interest rate futures contract of a similar maturity to the loan.
C)swap the adjustable rate loan for another of a different maturity.
D)none of the above
Q3) Refer to Instruction 9.1. Which strategy (strategies)will eliminate credit risk?
A)Strategy #1
B)Strategy #2
C)Strategy #3
D)Strategy #1 and #2
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Chapter 10: Foreign Exchange Rate Determination and Forecasting
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Sample Questions
Q1) It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.
A)True
B)False
Q2) Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.
A)long-term investment; long-term capital appreciation.
B)long-term capital appreciation; desire to hedge a receivable.
C)the desire to hedge a payable; the desire for long-term investment.
D)the desire for long-term investment; the desire to hedge a payable.
Q3) The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.
A)balance of payments
B)monetary
C)asset market
D)law of one price
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Page 12
Chapter 11: Transaction Exposure
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Sample Questions
Q1) Refer to Instruction 11.2. OTI chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be ________.
A)$2,500,000
B)$3,450,000
C)$3,500,000
D)$3,575,000
Q2) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.
A)increase; not change B)decrease; not change
C)not change; increase D)not change; not change
Q3) In efficient markets, interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same. A)True
B)False
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Chapter 12: Operating Exposure
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Sample Questions
Q1) ________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.
A)Operating; translation; transaction
B)Transaction; operating; translation
C)Accounting; translation; transaction
D)Translation; operating; transaction
Q2) Which of the following is NOT an important impediment to widespread use of parallel loans?
A)Difficulty in finding an appropriate counterparty.
B)The risk that one of the parties will fail to return the borrowed funds when agreed.
C)The process does not avoid exchange rate risk.
D)All of the above are significant impediments.
Q3) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.
A)forward loan
B)currency hedge
C)counterparty
D)currency swap
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Chapter 13: Translation Exposure
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Sample Questions
Q1) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.
A)maximize translation; no transaction
B)eliminate translation; transaction
C)maximize transaction; no translation
D)eliminate transaction; translation
Q2) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
Q3) The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s)of each.
Q4) Translation exposure may also be called ________ exposure.
A)transaction
B)operating
C)accounting
D)currency
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Chapter 14: The Global Cost and Availability of Capital
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Sample Questions
Q1) The optimal capital budget
A)occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects.
B)is typically larger for purely domestic firms than for MNEs.
C)is an illusion found only in international finance textbooks.
D)none of the above
Q2) One of the elegant beauties of international equity markets is that over the last 100 or so years, the average market risk premium is almost identical across major industrial countries.
A)True
B)False
Q3) Systematic risk
A)is the standard deviation of a security's return.
B)is measured with beta.
C)is measured with standard deviation.
D)none of the above
Q4) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
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Chapter 15: Sourcing Equity Globally
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Sample Questions
Q1) Investment banking services include which of the following?
A)advising when a security should be cross-listed
B)preparation of stock prospectuses
C)help to determine the price of the issue
D)all of the above
Q2) Which of the following is NOT an advantage of ADRs to U.S. shareholders?
A)Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B)In the event of the death of the shareholder, the estate does not go through a foreign court.
C)Settlement for trading is generally faster in the United States.
D)All of the above are advantages of ADRs.
Q3) Most firms raise their initial capital in foreign markets.
A)True
B)False
Q4) In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity?
A)enhance a firm's local image
B)become more familiar with the local financial community
C)get better local press coverage
D)all of the above
Page 17
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Chapter 16: Sourcing Debt Globally
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Sample Questions
Q1) Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary. Funding from sister subsidiaries are considered external funding.
A)True
B)False
Q2) TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/ at the time the loan was made to $1.45/ at the end of the first year, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)?
A)1.73%
B)5.50%
C)10.50%
D)9.27%
Q3) ________ are domestic currencies of one country on deposit in a second country.
A)LIBORs
B)Eurocurrencies
C)Federal funds
D)Discount window deposits
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Page 18
Chapter 17: International Portfolio Theory and Diversification
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Sample Questions
Q1) Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.
A)True
B)False
Q2) Refer to Instruction 17.1. At an average price of 60/share, how many shares of stock will the investor be able to purchase?
A)8333 shares
B)6410 shares
C)6173 shares
D)10,833 shares
Q3) In some respects, internationally diversified portfolios are different from a domestic portfolio because
A)investors may also acquire foreign exchange risk.
B)international portfolio diversification increases expected return but does not decrease risk.
C)investors must leave the country to acquire foreign securities.
D)all of the above
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Page 19
Chapter 18: Foreign Direct Investment Theory and Political Risk
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Sample Questions
Q1) OPIC stands for
A)Organization for the Prevention of Insufficient Capitalization.
B)Organization of Petroleum Importing Countries.
C)Overseas Private Investment Corporation.
D)Overseas Public Insurance Commission.
Q2) Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary?
A)The parent makes a deposit equal to the size of the desired loan into a large commercial bank.
B)The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate.
C)The lending bank is located in the subsidiary's country.
D)All of the above are typical characteristics of a fronting loan.
Q3) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
Q4) List and explain three strategic motives why firms become multinationals and give an example of each.
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Chapter 19: Multinational Capital Budgeting
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Sample Questions
Q1) When estimating a firm's cost of equity capital using the CAPM, you need to estimate
A)the risk-free rate of return.
B)the expected return on the market portfolio.
C)the firm's beta.
D)all of the above
Q2) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.
A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.
Q3) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.
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Chapter 20: Multinational Tax Management
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Q1) In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates than the U.S.
A)True
B)False
Q2) The U.S. Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making, thus establishing a "guilty until proved innocent" tax approach.
A)True
B)False
Q3) A tax that is a form of social redistribution of income is defined as a/an ________ tax.
A)un-American
B)transfer
C)flat
D)none of the above
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Chapter 21: Working Capital Management
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Sample Questions
Q1) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.
A)Syndicated banking
B)Centralized depositing
C)Multilateral netting
D)Debt cancellation
Q2) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.
Q3) Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.
Q4) Which of the following actions will result in an increase in NWC?
A)An increase in A/P that exceeds an increase in A/R.
B)A reduction in inventory.
C)A reduction in A/P plus a smaller reduction in A/R.
D)An increase in A/P and a smaller reduction in inventory.
Q5) For disbursement purposes, it is to the benefit of the firm to minimize float.
A)True
B)False
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Chapter 22: International Trade Finance
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Sample Questions
Q1) A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment.
A)irrevocable
B)revocable
C)confirmed
D)unconfirmed
Q2) A straight bill of lading is most likely to be used under which of the following circumstances?
A)when the merchandise has not been paid for in advance
B)when the transaction is being financed by a bank
C)when the shipment is to an affiliate
D)none of the above
Q3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an
A)unaffiliated known party transaction.
B)unaffiliated unknown party transaction.
C)affiliated party transaction.
D)none of the above
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