Multinational Financial Management
Chapter Exam Questions
Course Introduction
Multinational Financial Management explores the financial strategies and challenges faced by firms operating in the global marketplace. The course covers key topics such as foreign exchange markets, currency risk management, international financial markets, cross-border investment decisions, global capital budgeting, and the impact of international regulations and tax policies. Students learn how to analyze and manage financial risks, evaluate international financing options, and optimize capital structure in a multinational context. Emphasis is placed on practical decision-making tools and techniques that help corporations achieve financial objectives while navigating the complexities of different economic, political, and legal environments.
Recommended Textbook Fundamentals of Multinational Finance 5th Edition by Michael H. Moffett
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Chapter 1: Multinational Financial Management: Opportunities and Challenges
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Q1) The Eurocurrency loan market is characterized by narrow interest rate spreads between deposit and loan rates. This is due in part to which of the following factors?
A) The Eurocurrency market is a "wholesale" market.
B) Loan amounts are very large, often in excess of $500,000.
C) Eurocurrency borrowers are typically large, low-risk corporations or government entities.
D) All of the above are legitimate reasons for the narrow spread in the Eurocurrency market.
Answer: D
Q2) The authors describe the multinational phase of globalization for a firm as one characterized by the
A) ownership of assets and enterprises in foreign countries.
B) potential for international competitors or suppliers even though all accounts are with domestic firms and are denominated in dollars.
C) imports from foreign suppliers and exports to foreign buyers.
D) requirement that all employees be multilingual.
Answer: A
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Chapter 2: The International Monetary System
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Q1) The global recession of 2009/2010 saw the major global economic players (USA, China, and Europe) each choose the same international currency goals from the "impossible trinity". Meaning each felt an independent monetary policy was the most important goal followed by free movement of capital, and third, a policy of free floating currencies.
A)True
B)False
Answer: False
Q2) Which of the following is NOT an argument against dollarization?
A) The dollarized country's central bank can no longer act as a lender of last resort.
B) The dollarized country can no longer profit from seignorage (the ability to profit from the creation of money within its economy).
C) The dollarized country losses sovereignty over its own monetary policy.
D) All of the above are arguments against dollarization from the viewpoint of the affected country.
Answer: D
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Chapter 3: The Balance of Payments
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Q1) Construct, in a static (accounting) form the equation for a nations GDP as presented by the authors. Identify each term (e.g., r = interest rate). How does a positive BOP account balance affect a country's GDP?
Answer: GDP = C + I + G + X - M, where: GDP = gross domestic product, C = consumption spending, I = investment spending, G = government spending, X = exports of goods and services, and M = imports of goods and services. An increase (surplus) in the account balance will increase GDP.
Q2) Which of the following is the best definition of money laundering?
A) legal transfer of funds through the usual international payments mechanisms
B) the transfer of cash into collectibles that are then transferred across borders
C) the cross-border purchase of assets that are then managed in a way that hide the movement of money and its ownership
D) false invoicing of international trade transactions
Answer: C
Q3) In general, a country's exports decrease as foreign income decreases.
A)True
B)False
Answer: True
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Chapter 4: Financial Goals and Corporate Governance
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Q1) The stakeholder capitalism model is characterized by the desire of controlling shareholders to maximize long-term return to equity just as in the shareholder wealth maximization model of corporate governance. However, stakeholder capitalism controlling shareholders are more constrained by which of the following groups than in the shareholder wealth maximization model?
A) banks
B) governments
C) other powerful stakeholders
D) all of the above
Q2) Anglo-American equity markets are characterized by widespread ownership of shares. In other parts of the world ownership is often dominated by consortiums of controlling shareholders. Which of the following is NOT an example of a common consortium of controlling shareholders?
A) Japanese keiretsus
B) South Korean chaebols
C) U.S. labor unions
D) All of the above are common controlling consortiums.
Q3) Compare and contrast the Shareholder Wealth Maximization model and the Stakeholder Capitalism model for purposes of managerial goals.
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Chapter 5: The Foreign Exchange Market
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Q1) Swap and forward transactions account for an insignificant portion of the foreign exchange market.
A)True
B)False
Q2) Dealers sometimes use brokers in the foreign exchange market because the dealers desire
A) speed.
B) accuracy.
C) to remain anonymous.
D) all of the above.
Q3) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this is known as ________ whereas ________ are expressed as dollars per foreign unit.
A) European terms; indirect
B) American terms; direct
C) American terms; European terms
D) European terms; American terms
Q4) Identify and explain the three functions of the foreign exchange market.
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Chapter 6: International Parity Conditions
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Q1) If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true?
A) The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now.
B) The distribution of possible actual spot rates in the future is centered on the forward rate.
C) The future spot rate will actually be equal to what the forward rate predicts.
D) All of the above are true.
Q2) If according to the law of one price if the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is
A) overvalued.
B) undervalued.
C) correctly valued.
D) unknown relative valuation.
Q3) The Fisher Effect is a familiar economic theory in the domestic market. In words, define the Fisher Effect and explain why you think it is also appropriately applied to international markets.
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Chapter 7: Foreign Currency Derivatives and Swaps
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Q1) A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to
A) pay fixed-rate interest and receive floating rate interest.
B) pay floating rate and receive fixed rate.
C) pay fixed rate and receive fixed rate.
D) pay floating rate and receive floating rate.
Q2) A call option whose exercise price is less than the spot rate is said to be
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.
Q3) Foreign currency options are available both over-the-counter and on organized exchanges.
A)True
B)False
Q4) An option whose exercise price is equal to the spot rate is said to be A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) on-the-spot.
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Chapter 8: Foreign Exchange Rate Determination
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Q1) The "tequila effect" is a slang term used to describe a form of financial panic called A) run on the market.
B) speculation.
C) contrary investing.
D) contagion.
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) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.
Q4) Describe the Russian ruble collapse through August of 1998.
Q5) Assume your country has a balance of payments surplus. How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?
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Chapter 9: Transaction Exposure
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Q1) Refer to Instruction 9.1. The cost of a call option to Plains States would be
A) $17,653.
B) $16,733.
C) $18,471.
D) There is not enough information to answer this question.
Q2) Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.
A) transaction; operating
B) operating; transaction
C) operating; accounting
D) none of the above
Q3) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False
Q4) List and define the three types of foreign exchange exposure presented by your authors.
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Chapter 10: Translation Exposure
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Q1) Translation exposure may also be called ________ exposure.
A) transaction
B) operating
C) accounting
D) currency
Q2) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.
A)True
B)False
Q3) If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro then the U.S. firm has a translation
A) gain of $50,000.
B) loss of $50,000.
C) gain of $450,000.
D) loss of euro 450,000.
Q4) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
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Chapter 11: Operating Exposure
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Q1) Which of the following is NOT an advantage of foreign exchange risk management?
A) the reduction of the variability of cash flows due to domestic business cycles
B) increased availability of capital
C) reduced cost of capital
D) All of the above are potential advantages of foreign exchange risk management.
Q2) Which of the following is NOT an example of a financial cash flow?
A) parent invested equity capital
B) interest on intrafirm lending
C) payment for goods and services
D) intrafirm principal payments
Q3) The particular strategy of trying to offset inflows of cash from one country with outflows of cash in the same currency is known as
A) hedging.
B) diversification.
C) matching.
D) balancing.
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Chapter 12: The Global Cost and Availability of Capital
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Q1) A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other, unsegmented markets.
A)True
B)False
Q2) International Portfolio constructed of diversified international securities
A) is adding foreign exchange risk to the portfolio and increasing the total risk because the assets are less than perfectly correlated.
B) has total return identical to the return of the domestic portfolio.
C) is less complex than the domestic portfolio because of less portfolio composition and diversification possibilities.
D) None of the above
Q3) The capital asset pricing model (CAPM) is an approach
A) to determine the price of equity capital.
B) used by marketers to determine the price of saleable product.
C) can be applied only to domestic markets.
D) none of the above.
Q4) What motivates portfolio investors to purchase and hold foreign securities in their portfolio?
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Chapter 13: Raising Equity and Debt Globally
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Q1) Of the following, which is NOT an internal source of financing for the foreign subsidiary?
A) equity in the form of cash from the parent firm
B) equity in the form of real goods from the parent
C) debt in the form of loans from the same commercial bank used by the parent
D) All of the above are internal sources of financing for the foreign subsidiary.
Q2) Of the following, which is NOT considered to be an advantage to MNEs of having a financial structure adhere to local debt norms?
A) A localized financial structure reduces criticism of foreign subsidiaries that have previously used a different capital structure.
B) A localized financial structure helps management evaluate return on equity investment relative to local competitors in the same industry.
C) MNE have a competitive advantage over the locals, thus by using the local capital structure, the MNE is even stronger.
D) All of the above are noted as advantages to having a localized capital structure.
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Chapter 14: Multinational Tax Management
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Q1) A value-added tax has gained widespread use in Western Europe, Canada, and parts of Latin America.
A)True
B)False
Q2) What is the total value of taxes paid in the following example if the value added tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.
A) $0.15
B) $0.20
C) $0.30
D) $0.40
Q3) ________ taxes are applied to income and ________ taxes are applied to some other measurable performance characteristic of the firm.
A) Income; direct
B) Indirect; income
C) Indirect; direct
D) Direct; indirect
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Chapter 15: International Trade Finance
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Q1) In a typical forfaiting agreement the importer and exporter agree between themselves on a series of imports to be paid for over a period of time, typically three to five years.
A)True
B)False
Q2) Forfaiting is a complicated process. The author describes the procedure through a seven part process. Please describe the forfaiting process.
Q3) An exporter has just received a banker's acceptance created by an international transaction. If the banker's acceptance has a face value of $250,000 and the bank charges a commission of 1% per annum, how much will the exporter receive from the banker if the acceptance is held until maturity six months from today?
A) $250,000
B) $247,500
C) $248,750
D) $1,250
Q4) Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.
Q5) What is the trade dilemma and how is the dilemma generally solved?
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Chapter 16: Foreign Direct Investment and Political Risk
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Q1) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
Q2) Which of the following would NOT be considered a non-tariff barrier to trade?
A) inconsistent customs and administrative entry procedures
B) unduly stringent or discriminating standards imposed on imports in the name of protecting health, safety, and quality
C) established import procedures that make importing more difficult
D) All of the above are non-tariff trade barriers.
Q3) A/n ________ would be an example of an owner-specific advantage for an MNE.
A) patent
B) economy of scale
C) economy of scope
D) all of the above
Q4) Of the following, which would NOT be considered a firm-specific risk?
A) the risk of getting new management
B) management policies toward hedging foreign exchange risk
C) parent company policy toward management of local subsidiaries
D) All could be considered firm-specific risk.
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Chapter 17: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Which of the following is NOT a basic step in the capital budgeting process?
A) Identify the initial capital invested.
B) Estimate the cash flows to be derived from the project over time.
C) Identify the appropriate interest rate at which to discount future cash flows.
D) All of the above are steps in the capital budgeting process.
Q2) Refer to Table 17.1. The NPV for the European investment is estimated at A) euro 4,945.
B) $4,945.
C) $6,420.
D) euro 6,420.
Q3) For international investments, relative to project cash flows, parent cash flows are often dependent on the form of financing.
A)True
B)False
Q4) A foreign firm that is 20% to 49% owned by a parent is called a/an
A) subsidiary.
B) affiliate.
C) partner.
D) rival.
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