Multinational Financial Management
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Course Introduction
Multinational Financial Management explores the financial strategies and decision-making processes of firms operating in a global environment. The course examines topics such as foreign exchange markets, risk management, international investment and financing, multinational capital budgeting, and the impact of political and economic factors on cross-border operations. Students learn how to analyze currency exposure, assess international funding choices, and navigate the complexities of diverse regulatory and tax systems, equipping them with the skills to manage financial challenges and seize opportunities presented by international business activities.
Recommended Textbook
International Financial Management Canadian Perspective 3rd Edition by Don Brean
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) The euro
A) is the common currency of Europe.
B) is backed by gold.
C) is an electronic currency with no physical bills.
D) is the currency of Britain.
Answer: A
Q2) If people in both countries eat the same dish that requires 0.1 kg of tomatoes and 1.4 kg of potatoes to prepare,how much potatoes will be produced in the Republic of Belarus?
A) None
B) 333.33 tons
C) 500 tons
D) 666.67 tons
Answer: C
Q3) What is the goal of sound financial management?
Answer: The goal of financial management is shareholder wealth maximization in domestic and international finance.This goal is generally accepted in the "Anglo-Saxon" countries but less so in other parts of the world where other stakeholders are also considered important.
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Page 3
Chapter 2: International Monetary System
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Q1) The international monetary system went through several distinct stages of evolution.These stages are summarized,in alphabetic order,as follows: (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period
The (chronological)order that they actually occurred is:
A) (iii), (i), (iv), (ii), and (v)
B) (i), (iii), (v), (ii), and (iv)
C) (vi), (i), (iii), (ii), and (v)
D) (v), (ii), (i), (iii), and (iv)
Answer: B
Q2) 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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4
Chapter 3: Balance of Payments
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Sample Questions
Q1) The balance on the reserves account (BRA),under the fixed exchange regime is:
A) -$44 billion
B) $44 billion
C) $216 billion
D) $0 billion
Answer: A
Q2) Why should the balance of payments always be zero for countries with flexible exchange rates?
Answer: If the currency of a country is flexible,the current account and the capital account should balance each other out.If Canada buys more goods,services,and the like than it sells,it must finance that deficit on the current account by means of a capital account surplus.In other words,foreigners must buy real or financial assets to finance the current account deficit.Conversely,if a country has a surplus on the current account,it must have a deficit on the capital account.This means that the country sells more goods and services to the world than it buys and the capital earned is spent on buying real or financial assets abroad.
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Chapter 4: The Market for Foreign Exchange
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Q1) The 3 month forward rate between British pound and the Swiss franc is £0.5/SF.The current spot rate is £0.51/SF.Assuming 360 days in a year,what is the correct statement from the below?
A) The Swiss franc is trading at a 1.96% premium to the British pound for delivery in 90 days.
B) The Swiss franc is trading at a 7.84% premium to the British pound for delivery in 90 days.
C) The Swiss franc is trading at a 1.96% discount to the British pound for delivery in 90 days.
D) The Swiss franc is trading at a 7.84% discount to the British pound for delivery in 90 days.
Q2) If F/S < (1 + i)/(1 + i*)(where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.),which of the following is true?
A) Arbitrage is not possible
B) Arbitrage is possible and arbitrage strategy involves borrowing $.
C) Arbitrage is possible and arbitrage strategy involves borrowing £.
D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.
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Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) Canada's competitive position will:
A) strengthen when the dollar appreciates more than is warranted by PPP.
B) not be affected when the dollar appreciates more than is warranted by PPP.
C) weaken when the dollar appreciates more than is warranted by PPP.
D) weaken when the dollar depreciates more than is warranted by PPP.
Q2) The international Fisher effect is the same as the:
A) uncovered interest rate parity.
B) covered interest rate parity.
C) purchasing power parity.
D) efficient Fisher effect.
Q3) Purchasing Power Parity (PPP)theory states that:
A) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.
B) as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will appreciate against stable currencies.
C) the prices of standard commodity baskets in two countries are not related.
D) the exchange rate between currencies of two countries will not be equal to the ratio of the countries' price levels.
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Chapter 6: International Banking and Money Market
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Q1) Which of the following is an example of a Eurodollar?
A) A dollar deposit in an American bank.
B) A Yen deposit in a Japanese bank.
C) A dollar deposit in a French bank.
D) Euro deposited in European bank.
Q2) Since SR < AR,then
A) ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 91-day FRA period
B) XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 91-day FRA period
C) ABC Bank will pay XYZ Bank a cash settlement at the end of the 91-day FRA period
D) XYZ Bank will pay ABC Bank a cash settlement at the end of the 91-day FRA period
Q3) A country whose banking system is organized to permit external accounts beyond the normal economic activity of the country is called:
A) representative country.
B) offshore banking centre.
C) onshore banking centre.
D) full service country.
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Chapter 7: International Bond Market
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Q1) A five-year $1,000 face value floating-rate note (FRN)has coupons referenced to six-month dollar LIBOR,and pays coupon interest semiannually.Assume that the last six-month LIBOR was 6.5 percent and the current six-month LIBOR is 6 percent.If the risk premium above LIBOR that the issuer must pay is 0.25%,by how much did the coupon payment change?
A) increase by $2.5
B) decrease by $2.5
C) increase by $5
D) decrease by $5
Q2) Fixed-rate notes issued by a corporation with maturities ranging from less than 1 year to about 10 years in the international bond markets are called:
A) international straight-fixed rate notes.
B) euro-medium term notes.
C) euro floating-rate bonds.
D) international equity-related bonds.
Q3) 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: International Equity Markets
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Q1) Assume that Accor shares are trading at A$2.5 in Sydney and $28 in New York.Each ADR equals 20 shares.The current exchange rate is A$1.5/$.At what transaction cost per share would there be no profit opportunity?
Q2) 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.
Q3) Canadian stocks are cross-listed in the United States as:
A) American depository receipts.
B) Global depository receipts.
C) Ordinary shares.
D) Global registered shares.
Q4) Shares trade on foreign exchanges in all of the following forms except:
A) American depository receipts.
B) Global depository receipts.
C) American registered shares.
D) Global registered shares.
Page 10
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Chapter 9: Futures and Options on Foreign Exchange
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Q1) What is the lowest possible 1-year forward $/£ exchange rate FROM THE LIST BELOW?
A) $1.93/£
B) $1.96/£
C) $2.01/£
D) $2.05/£
Q2) 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.
Q3) Today's settlement price on a Chicago Mercantile Exchange (CME)Euro futures contract is $1.2010/EUR.Your margin account currently has a balance of $2,500.The next two days' settlement prices are $1.2210/EUR and $1.2010/EUR.(The contractual size of one CME EURO contract is EUR 125,000).Calculate your margin account balance at the end of the first and second day if you have a long position on Euro futures.
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11
Chapter 10: Interest Rate and Currency Swaps
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Q1) Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as:
A) "basis risk refers" to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk refers" to a situation in which the floating rates of the two counterparties are not pegged to the same index.
B) "basis risk refers" to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk refers" to a situation in which the floating rates of the two counterparties are not pegged to the same index.
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Chapter 11: International Portfolio Investment
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Sample Questions
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) A Canadian investor holds the British market portfolio.Calculate the variance of the monthly rate of return in Canadian dollar terms,if the variance of the British market return is 2,the variance between the U.S.dollar and the foreign currency is 20,the covariance is -2.34,and the contribution of the cross-product term is 0.06.
A) -17.38
B) -14.48
C) 14.48
D) 17.38
Q3) A US investor bought shares in ABC Inc.on the Frankfurt Stock Exchange 2 years ago for EUR 10,000.The exchange rate at that time was EUR 1.20/USD.Currently,the shares are worth EUR 11,000 and the exchange rate is EUR 0.80/$.Calculate the investor's annual percentage rate of return in terms of the U.S.dollars.
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Page 13
Chapter 12: Management of Economic Exposure
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Q1) ABC Inc.,a Canadian paper manufacturer,has a subsidiary in the United States which sources its wood from Canada.The US dollar depreciates rapidly.Discuss the likely competitive and conversion effects of the depreciation of the US dollar.
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) Exposure to currency risk can be measured by the sensitivities of:
A) the future foreign currency values of the firm's assets and liabilities.
B) the firm's operating cash flows to specific changes in exchange rates.
C) the future home currency values of the firm's assets and liabilities.
D) None of these.
Q4) How can operating exposure be managed?
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Chapter 13: Management of Transaction Exposure
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Sample Questions
Q1) Which of the following is a financial hedge?
A) Invoice currency selection
B) Lead/lag strategy
C) Exposure netting
D) Money market hedge
Q2) The most direct and popular way of hedging transaction exposure is by:
A) exchange-traded futures options.
B) currency forward contracts.
C) foreign currency warrants.
D) borrowing and lending in the domestic and foreign money markets.
Q3) ABC Inc.,an exporting firm,expects to earn $20 million if the dollar depreciates,but only $10 million if the dollar appreciates.Assume that the dollar has an equal chance of appreciating or depreciating.Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
A) $3,375,000
B) $6,000,000
C) $1,500,000
D) $4,500,000
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Chapter 14: Management of Translation Exposure
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Q1) A Canadian firm has an integrated foreign operation in the United States.Which of the following statements is true?
A) If the US dollar appreciates, the Canadian dollar value reported in the balance sheet of the assets in the United States will be smaller.
B) If the US dollar depreciates, the Canadian dollar value reported in the balance sheet of the assets in the United States will be larger.
C) If the US dollar depreciates, the Canadian dollar value reported in the balance sheet of the assets in the United States will be smaller.
D) Need more information
Q2) The "functional currency" is:
A) the currency of the primary economic environment in which the entity operates.
B) the currency in which the MNC prepares its consolidated financial statements.
C) a currency that is not the parent firm's home country currency.
D) None of these.
Q3) Assume that translation or transaction exposure cannot be hedged at the same time and you have to decide on the firm's hedging policy.What should you do?
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Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Explain political risk and its three main classifications.How can political risk be incorporated in the decision making process when firms decide on whether to invest in foreign project or not?
Q2) Greenfield investment:
A) is an investment in agricultural industry.
B) is an investment in a an environmentally friendly technology. C) can be a result of a cross-border acquisition of any existing and operational business abroad.
D) None of these.
Q3) ABC Inc.,located in Vancouver,BC wants to buy XYZ Inc.,located in Seattle,WA.What does the ABC Inc.have to consider so that the acquisition will be successful?
Q4) How can firms establish a wholly owned subsidiary in a foreign country? What are the advantages and disadvantages of each method?
Q5) The following are barriers to trade except:
A) Tariffs
B) Transportation costs
C) Telecommunications
D) Import taxes
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Q6) How can Export Development Canada (EDC)help firms to deal with political risk?
Chapter 16: International Capital Structure and the Cost of Capital
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Q1) If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is: (Do not round intermediate calculations and round your final answer to nearest whole percent)
A) 8%
B) 9%
C) 10%
D) 12%
Q2) Assume that ABC Corporation is a leveraged company with the following information.Its marginal income tax rate is 35%,its average income tax rate is 25%,and its before tax-cost of borrowing is 6%.The firm's domestic beta is 1.2 and its world market beta is 1.The domestic market return is 10% and the world market return is 11%.The risk-free rate is 4%.The firm's debt-to-equity ratio is 1:3.Determine the firm's weighted average cost of capital if capital markets are segmented.
Q3) To adjust cost of equity for a country-specific risk,one needs to:
A) use both global equity market and that country's market beta.
B) take into account how much the company is susceptible to political risk.
C) take into account both systematic and unsystematic risk.
D) use at least two of the these methods.
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Chapter 17: International Capital Budgeting
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Q1) A real option is:
A) a commodity option.
B) an option that has 90% probability or higher to be in the money at the time of maturity.
C) an ability to close the production line.
D) None of these.
Q2) The option to quit a foreign project early is called:
A) timing option.
B) abandonment option.
C) growth option.
D) exercise option.
Q3) Capital budgeting analysis is very important,because it:
A) involves, usually expensive investments in capital assets.
B) has to do with the productive capacity of a firm.
C) will determine how competitive and profitable a firm will be.
D) All of these.
Q4) Which cash flows are relevant for the international capital budgeting analysis?
Q5) 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: Multinational Cash Management
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Q1) Soleil Inc.has an affiliate in Brazil and one in South Africa.The entire production of the South Africa affiliate is sold to the affiliate in Brazil which sells the final product to customers.The Brazilian affiliate has sales of 1000 and overhead costs of 100.The cost of goods sold in South Africa is 500 and overhead amounts to 300.The income tax rates are 40 percent in Brazil and 20 percent in South Africa.Assume that neither South Africa nor Brazil put any restrictions on the transfer price.What is the optimal transfer price? What are the total taxes paid?
Q2) Asian Antiques of Bangkok,Thailand,buys antiques in Asia and sells them via sales affiliates in the United Kingdom and the Unites States.The following payments matrix of inter-affiliate cash flows,stated in Thailand is forecasted for next month.
Q3) Assume that the US and Canadian governments impose no restrictions on transfer pricing.What transfer price should Company ABC charge?
A) $5,000.
B) $6,000.
C) $7,000.
D) $10,000.
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Page 20
Chapter 19: Exports and Imports
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Q1) If the 90-day B/A rates are 5%,determine the amount the exporter will receive if he holds the B/A until maturity.(Round your final value to nearest whole dollar.Assume 360 days in a year.)
A) $2,800,000.
B) $2,807,018.
C) $2,842,640.
D) $3,000,000.
Q2) A banker's acceptance is:
A) a guarantee from the importer's bank that is will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents are presented.
B) is a written order instructing the importer or his agent to pay the amount specified on its face on a certain date.
C) is a document issued by the common carrier specifying that it has received the goods for shipment.
D) is a negotiable money market instrument for which a secondary market exists.
Q3) Explain the major differences between international and domestic trade.
Q4) Name and explain the three most important documents in a typical international trade transaction.
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Page 21
Chapter 20: International Tax Environment
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Q1) The three basic types of taxation are:
A) income tax, withholding tax, and value-added tax.
B) income tax, withholding tax, business tax.
C) withholding tax, value-added tax, corporate tax.
D) personal tax, corporate tax, and operating tax.
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) A product sells in the first stage of production for EUR600,the second stage of production for EUR 1,400 and the third stage of production for EUR 1,700.If the value-added tax (VAT)rate is 15%,what would be the total VAT?
A) EUR 90.
B) EUR120.
C) EUR210.
D) EUR255.
Q4) What are the major ways in which countries levy taxes?
Q5) How can double taxation result out of the two major ways to determine who has to pay taxes?
Page 22
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Chapter 21: Corporate Governance Around the World
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Q1) Dominant investors may acquire control through all of the following except:
A) interfirm cross-holdings.
B) intrafirm cross-holdings.
C) shares with superior voting rights.
D) pyramidal ownership structure.
Q2) Commercial legal systems of most countries are derived from four legal origins.Which of the following is not one of them?
A) English Common law.
B) French Common law.
C) German Common law.
D) Italian common law.
Q3) How can listing overseas benefit the corporate governance of a public company?
Q4) Private benefits of corporate control will tend to be higher in:
A) in French civil law countries than in English common law countries.
B) in English common law countries than in French civil law countries.
C) in French civil law countries than in Scandinavian civil law countries.
D) In English common law countries than in German civil law countries.
Q5) How are investors protected under English common law? What are the implications?
Q6) Discuss the major advantage and key weakness of a public corporation.
Page 23
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