Multinational Financial Management
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Course Introduction
Multinational Financial Management explores the financial challenges and opportunities facing organizations that operate on a global scale. The course covers key topics such as foreign exchange markets, international financial markets, cross-border investment decisions, currency risk management, and international capital structure and funding. Students learn to analyze and address issues related to international taxation, transfer pricing, and global financial strategy. Emphasis is placed on understanding the impact of economic, political, and cultural differences on financial decision-making in multinational firms, equipping students with the tools needed to navigate financial complexities in an increasingly integrated world economy.
Recommended Textbook
International Corporate Finance 1st Edition by
J. Ashok Robin
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Chapter 1: Introduction
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Q1) An example of the widespread belief that political freedom is necessary for economic freedom and economic growth can be found in:
A)the emergence of Japan as an international economic force in the latter part of the 20<sup>th</sup> century.
B)the widespread availability of technical education in India.
C)the rise of Brazil as an economic powerhouse in the Southern Hemisphere.
D)the demise of the Soviet Union and the rise of an entrepreneurial class in Russia.
Answer: D
Q2) Global corporations are often referred to as:
A)multinational corporations.
B)international corporations.
C)global enterprises.
D)international consortiums.
Answer: A
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Chapter 2: International Financial Markets: Structure and Innovation
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Q1) In a currency quote,the first three letters identify the __________________ and the last three letters identify the _____________________.
A)domestic currency;term currency
B)base currency;term currency
C)foreign currency;base currency
D)domestic currency;foreign currency
Answer: B
Q2) The two key financial instruments used in the Eurocurrency markets are:
A)foreign exchange swap agreements and Euro commercial paper.
B)Euro commercial paper and Euro certificate of deposit.
C)Euro certificate of deposit and Euro negotiable instruments.
D)Euro negotiable instruments and foreign exchange swap agreements.
Answer: B
Q3) Most transactions in Eurocurrency markets are:
A)transactions involving governmental entities.
B)secured transactions between sovereign wealth funds and MNCs.
C)secured transactions between Interbanks and MNCs.
D)unsecured transactions between private parties.
Answer: D
4
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Chapter 3: Currency and Eurocurrency Derivatives
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Q1) In calculating forward pricing,the underlying asset,currency,is called the ________________ and is represented in calculations as:
A)target asset;T.
B)the real asset;r.
C)spot asset;S.
D)the nondeliverable asset;n.
Answer: C
Q2) Financial instruments that allow the holder to elect to buy (or sell)underlying assets in the future are called:
A)real options.
B)financial options.
C)call options.
D)put options.
Answer: B
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Chapter 4: Currency Systems and Valuation
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Q1) A disadvantage of using a pegged currency system is that:
A)the country whose currency is pegged must decide on its own economic policies.
B)the country whose currency is pegged does not have the option of adopting economic policies different from those of the country to which the currency is pegged.
C)the cost of maintaining the peg is substantial and must be paid by those transacting business in the country whose currency is pegged.
D)international currency markets shun currency whose value is pegged to another currency.
Q2) Whether the Smithsonian Agreement was a reason for subsequent developments or not,the Smithsonian Agreement was followed by:
A)significant growth in international trade and the signing of several important international trading agreements.
B)destructive trade wars that threatened the stability of most of the world's strongest currencies.
C)the reorganization of the IMF.
D)new capital controls that were intended to moderate large swings in currency values.
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Chapter 5: Currency Parity Conditions
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Q1) What is covered interest arbitrage?
Q2) Anything that disrupts cross-border trading and manufacturing activities:
A)violates international trade agreements.
B)justifies retaliation by other countries suffering negative consequences from such disruptions.
C)can be resolved by the World Trade Organization.
D)can lead to disruption of purchasing power parity.
Q3) Purchasing Power Parity is most useful in explaining currency misalignments when it compares:
A)countries located in the same region of the world.
B)dissimilar economies.
C)countries at a similar stage of development.
D)longer periods of time as opposed to shorter periods of time.
Q4) If a price is "sticky",it:
A)does not change when currency values change but rather is affected by real world considerations.
B)is directly related to or "stuck" to currency values.
C)changes indirectly to currency value changes.
D)is affected only by changes in currency values and is not affected by other considerations.
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Chapter 6: Currency Risk Exposure Measurement
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Q1) The standard deviation of a currency is:
A)plus or minus the average value of the currency over a specific period.
B)square root of the variance of the currency.
C)the average of squared deviations from the mean.
D)an average of the deviations from the currency.
Q2) The Markowitz Portfolio Approach was primarily developed for analyzing equity portfolios:
A)so it is of little use in evaluating currency portfolios.
B)but it can be used effectively in evaluating currency portfolios.
C)but it can be used to evaluate transaction exposure.
D)and it cannot be used to evaluate transaction exposure.
Q3) The Markowitz Portfolio Approach suggests that:
A)diversification reduces currency risk.
B)cooperation reduces currency risk.
C)currency risk cannot be reduced.
D)currency risk and transaction risk are the same things.
Q4) What is the difference between operating exposure and transaction exposure?
Q5) How does conversion impact affect a firm's operating exposure?
Q6) Of all of the macroeconomic risks that firms face,which risk do experts generally agree is the most important for firms and why?
Page 8
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Chapter 7: Currency Exposure Management
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Q1) How does hedging assist a firm in reducing its currency exposure?
Q2) Because under parity the forward and the money market hedges provide identical outcomes,money market hedges are also known as:
A)symmetrical forward hedges.
B)synthetic forward hedges.
C)matching hedges.
D)asymmetrical forward hedges.
Q3) When a firm's currency position produces losses,if its hedge position is effective:
A)its derivatives will produce offsetting gains.
B)its derivative position will not be affected.
C)it can use those losses to offset taxable income from operations.
D)its on-balance sheet commitments will be reduced.
Q4) Hedging to address mitigation of transaction exposure primarily focuses on:
A)risk management.
B)payables and receivables.
C)research and development costs.
D)taxable income.
Q5) Why might an MNC have a currency exposure as the result of its business transactions?
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Chapter 8: Capital Budgeting
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Q1) What is the difference between "off shoring" and "outsourcing"?
A)Off shoring refers to manufacturing in others countries,while outsourcing refers to buying raw materials in other countries.
B)Off shoring is an activity of MNCs,while outsourcing is an activity of purely domestic firms.
C)Off shoring refers to obtaining foreign labor to work on domestic projects,while outsourcing refers to using contract domestic labor for domestic projects.
D)There is no difference,they are interchangeable terms.
Q2) Firms often screen potential projects before undertaking a full review by using considerations such as:
A)feasibility and how much the project will cost.
B)how much the project will cost and whether the firm will have to acquire additional resources for the project.
C)feasibility and how the project fits with the firm's strategy.
D)whether the project uses the firm's core competencies and how the project would affect the upper management of the firm.
Q3) How is NPV calculated and what information does NPV provide to a firm?
Q4) What are the components of country risk?
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Chapter 9: Advanced Capital Budgeting
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Q1) The simplest way to exercise the real option to abandon is to:
A)stop production before any more money is lost.
B)turn project assets over to local government.
C)invest enough money so that the project does not have to be abandoned.
D)fulfill existing contracts and then sell remaining assets.
Q2) The option to ___________________ allows a firm to change the scale of a project after committing to the project.
A)alter operating scale
B)abandon
C)grow
D)alter inputs
Q3) If a firm has an option to alter operating scale and decides that the operating scale should be altered,either positively or negatively,that decision may be thought of as the:
A)first step toward the eventual abandonment of the project.
B)investment of additional funds to increase or decrease production.
C)decision that must be made at the highest level of the firm.
D)exercise of the option to alter operating scale.
Q4) What are real options and how do they affect the estimated value of projects?
Q5) What are the causes of parent-subsidiary asymmetry?
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Chapter 10: Long-Term Financing
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Q1) The primary attraction of the Eurobond market is that:
A)it is in Europe where there are more opportunities for financing operations.
B)more investors are interested in Eurobonds than in any other kind of financing vehicle.
C)it offers flexible financing opportunities and minimal regulation.
D)it offers flexible financing opportunities and low costs.
Q2) MNCs can acquire financing for projects through either debt or equity.What is the difference between debt and equity?
Q3) In a plain vanilla swap the MNC:
A)swaps payments to be received in one currency for payments to be received in another currency.
B)trades interest payments to be made at a specified point in time for interest payments to be made at another point in time.
C)exchanges payments to be received from one entity for payments to be received by another entity.
D)exchanges fixed interest payments for interest payments based on a floating rate,expecting that the interest rate will increase.
Q4) What is cost of capital?
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Chapter 11: Optimizing and Financing Working Capital
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Q1) What are implicit transaction costs that MNCs incur in dealing with their cash balances?
A)Implicit transaction costs are costs of dealing with a firm's cash balances that are not disclosed to the firm until after the transaction is completed.
B)Implicit transaction costs incurred in dealing with an MNC's cash balance involve costs associated with making internal decisions about the firm's cash balance.
C)Implicit transaction costs are costs of arranging the firm's cash balances that the firm will not have to pay until a later time.
D)Implicit transaction costs are costs that are charged to a firm in connection with managing its cash balances that will be deducted from the firm's cash balance rather than being billed to the firm.
Q2) The equation for calculating working capital is:
A)quick assets - current liabilities.
B)current assets - current liabilities.
C)assets - liabilities.
D)current assets - liabilities.
Q3) How does a firm monetize receivables?
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Chapter 12: International Alliances and Acquisitions
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Q1) Large financial entities and very wealthy individuals who have funds to invest are the primary source of:
A)private equity funds.
B)cross-border M&A funds.
C)hedge funds.
D)globalized funds.
Q2) In a joint venture where the local firm has the right to buy the MNC's interest in the joint venture,the MNC is said to be:
A)In a short position.
B)In a long position.
C)Exposed.
D)Over-invested.
Q3) Methods of determining the value of a target in a merger or acquisition include:
A)the discounted cash flow method and the price-earnings method.
B)the weighted average cost of capital method and the discounted cash flow method.
C)the present value method and the price-earnings method.
D)the discounted cash flow method and the earnings-per-share method.
Q4) What is the difference between private equity funds and hedge funds?
Q5) How is outsourcing related to a firm's core competencies?
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Chapter 13: International Trade
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Q1) If there is informational asymmetry in a transaction,who bears the primary risk of default?
A)The exporter
B)The importer
C)Both the exporter and importer have the same risk of default
D)The financial institution financing the transaction
Q2) A prohibited subsidy,in the view of the WTO,is one that:
A)gives a domestic firm an advantage in international trade.
B)imposes serious prejudice on another country.
C)gives an advantage to domestic industrial research.
D)distorts international trade.
Q3) The mission of the G8:
A)is to provide loans and grants to member nations.
B)seeks to encourage foreign direct investment in developing nations.
C)states that all nations are entitled to balanced economic growth.
D)is not stated but,rather,is developing.
Q4) Explain the relationship between GATT and WTO.
Q5) Explain the differences between accounts receivable financing and accounts receivable factoring.
Page 15
Q6) Explain the mechanics of open accounts in international transactions.
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Chapter 14: International Taxation and Accounting
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Q1) The notational value of a derivative:
A)is used to determine its market value.
B)usually has nothing to do with its market value.
C)is closer to its market value the longer the term of the hedge.
D)is equivalent to the market value of the hedge in most cases.
Q2) Why do some small firms choose not to hedge transactions even though there may be a benefit from hedging?
A)They do not have the in-house expertise to enter into the proper hedging transactions.
B)The cost of complying with accounting regulations related to hedging outweigh the benefits that might be gained from hedging.
C)Small firms generally do not have enough at stake financially to allow them to deal with firms engaged in hedging.
D)Creditors of small firms generally refuse to allow the firms to be involved in hedging transactions.
Q3) How does the separate entity approach to taxation differ from the integrated system approach?
Q4) How does the concept of double taxation apply to MNCs?
Q5) How can MNCs benefit from using foreign tax credits?
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Chapter 15: International Portfolio Investments
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Q1) What does the ratio in the Sharpe Index indicate?
A)The risk per unit of return
B)The amount at risk in any investment
C)The amount of potential profit in an investment
D)The return per unit of risk
Q2) How does covariance risk affect foreign investments?
Q3) What is indicated if a mutual fund trades at a discount?
A)It means that the mutual fund is increasing in value.
B)It means that the value of the mutual fund on the mutual fund market is less than the net value of the assets in the fund.
C)It means that investors in the fund value their investments at more than the net value of the assets owned by the fund.
D)It means that the assets in the mutual fund are increasing in value.
Q4) The phenomenon that is evidenced by an underrepresentation of foreign investments in a portfolio is known as:
A)weighted-average investing.
B)home bias.
C)foreign bias.
D)portfolio investing.
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