Risk Management in International Finance Pre-Test
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Course Introduction
Risk Management in International Finance explores the identification, measurement, and mitigation of financial risks inherent in cross-border transactions and global financial markets. The course covers key topics such as exchange rate risk, country and sovereign risk, political and regulatory risks, and credit risk in international banking. Students learn about various financial instruments and strategies, including derivatives, hedging techniques, and portfolio diversification, to manage exposure in international operations. With a focus on real-world cases and emerging market challenges, the course provides insight into how multinational corporations, banks, and institutional investors evaluate and address risks in the dynamic environment of global finance.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
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Chapter 1: Globalization and the Multinational Corporation
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Q1) Which one of the following is the most common method of overcoming the agency problem in developed countries outside of the U.S.and the U.K?
A) concentrated ownership
B) currency boards
C) hostile takeovers
D) foreign direct investment
Answer: A
Q2) What do the Enron Corporation,Worldcom,and Tyco have in common?
A) They were part of the oil and gas industry.
B) All three were owned by a single parent company.
C) Each one was an example of sound corporate governance.
D) All were involved in corporate scandals.
Answer: D
Q3) State-owned investment funds that manage global portfolios of investment assets are known as
A) hedge funds.
B) sovereign wealth funds.
C) city-state pensions.
D) multinational mutual funds.
Answer: B
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Chapter 2: The Foreign Exchange Market
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Q1) What is a spot exchange-rate contract?
Answer: A spot exchange-rate contract is one that trades within forty eight hours.During the first 24 hours,buyers and sellers agree on the terms.The next 24 hours the traders must provide the currency in question and the funds to settle the contract.Due to time zone differences,the second 24 hours is often necessary to complete the transaction.
Q2) The cash manager at AmFlex Company needs to buy 1,000,000 British pounds to pay a British supplier.A currency broker quotes him a bid-ask rate of ?.4865-.5116/US$.What will be the dollar cost the 1,000,000 pounds?
A) $2,055,499
B) $1,954,652
C) $486,618
D) $511,587
Answer: A
Q3) Describe how an exchange rate is like a market price?
Answer: The direct quote for a currency is the local currency price (numerator)of one unit of foreign currency (denominator).
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Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) What is the statistical interpretation of the expected future spot rate?
Answer: The expected future spot rate is the conditional mean of the probability distribution of future spot rates.The probability distribution describes all of the possible realizations (or ranges of realizations)of the future spot rate and assigns probabilities to those values (or ranges of values).The conditional mean of the probability distribution of future spot rates takes a probability weighted average of those possible realizations (or ranges of realizations).We say that the expectation is conditional because we use all available information at the time when we are describing the probability distribution.
Q2) What is the name of the exchange rate specified in the forward contract?
A) spot rate
B) forward rate
C) future exchange rate
D) cross-rate
Answer: B
Q3) Why would an MNC use a spot-forward swap?
Answer: A spot-forward swap involves either the purchase of foreign currency spot against the sale of the same amount of foreign currency forward,or the sale of foreign currency spot against the purchase of the same amount of foreign currency forward.
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Chapter 4: The Balance of Payments
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Q1) What represents a credit to the investment income account of the balance of payments?
Q2) What is the subcategory in the current account that indicates that the government of a country and other residents gave more money to foreign countries and residents as gifts and grants than the country itself received from abroad?
A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Q3) Give an example of how the balance of payments provides information concerning exchange rate determination?
Q4) Explain the double-entry system of the balance of payments.
Q5) Persistent,large current account deficits are often associated with currency crises for floating rate currencies in which the currency with the crisis ________ substantially.
A) appreciates
B) devaluates
C) depreciates
D) revaluates
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Chapter 5: Exchange Rate Systems
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Q1) Why would a central bank buy or sell foreign currency?
Q2) Which one of the following systems would most often be used by a developing economy?
A) target zone
B) currency board
C) floating exchange rate
D) crawling peg
Q3) What is the relationship of currency risk in a floating exchange rate system to the future exchange rate changes?
Q4) In which one of the following systems would it be least difficult to quantify the currency risk?
A) floating exchange system
B) target zone system
C) pegged exchange rate system
D) currency board
Q5) How would a target zone system or a pegged exchange rate system that has been in place mask the true currency risk?
Q6) Why are pegged exchange rates often overvalued and difficult to governments to maintain?
Page 7
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Chapter 6: Interest Rate Parity
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Q1) What is the name for the bank market for deposits and loans that is denominated in a currency different to the currency of the country in which a bank is operating?
A) internal currency market
B) foreign exchange market
C) external currency market
D) interbank market
Q2) The difference between the interest rate that a bank charges on its loans and the interest rate that the banks pay their depositors is known as the A) percent spread.
B) arbitrage opportunity.
C) bid-ask spread.
D) covered interest arbitrage opportunity.
Q3) Which one of the following would be the most logical reason to use a synthetic forward contract to hedge?
A) forward contracts are not available in the currency of choice
B) when time horizons are short, forward contracts can be expensive
C) the underlying transaction is too risky
D) the underlying transaction gives you an asset
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) Describe how you construct the uncertain \(£\)-denominated return from investing 1 \(£\) in the Swiss franc money market.
Q2) What concept states that there is no systematic difference between the forward rate and the expected future spot rate,and that the expected forward market return is zero?
A) unbiased predictor
B) unbiasedness hypothesis
C) uncovered interest rate parity
D) unsystematic risk
Q3) Which one of the following would be an answer to why the forward exchange rate is an unbiased predictor of the future spot rate?
A) The forward rate is greater than the conditional expectation of the future spot rate.
B) The forward rate equals than the conditional expectation of the future spot rate.
C) The forward rate is less than the conditional expectation of the future spot rate.
D) The current spot rate is greater than the conditional expectation of the future spot rate.
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) Under what conditions could the law of one price be violated?
Q2) Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is ________.
A) $.00276
B) $.01190
C) $.00321
D) $.00102
Q3) In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as
A) mark to market
B) interest rate arbitrage
C) pricing to market
D) speculation
Q4) Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?
Q5) What is the distinction between relative purchasing power parity and absolute purchasing power parity?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) Which one of the following is NOT a type of subsidiary?
A) The Net Importer
B) The Net Exporter
C) The Neutral Firm
D) The Monopolist
Q2) ________ profitability refers to the purchasing power of a firm's nominal profits.
A) Real
B) Relative
C) Global
D) Inflation-adjusted
Q3) Why does the strategy of pricing-to-market depend on the assumption of market segmentation?
Q4) When the firm's nominal profits are divided by the price level,the result is known as ________.
A) nominal profitability
B) real profitability
C) inflation-adjusted profitability
D) relative profitability
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:
A) identical nominal returns imply very different real returns for investors in different countries.
B) returns in different currencies can have different currency risk premiums.
C) political risks or the threat of capital controls prevent investors from taking advantage of higher returns in other countries.
D) PPP deviations are not sizable and prolonged.
Q2) Two of the most often used determinants of exchange rates are ________.
A) real interest rate differentials and current account balances
B) nominal interest rates and current account balances
C) real interest rate differentials and real price levels
D) nominal interest rate and inflation rate differentials
Q3) Describe three statistics you should obtain from a currency-forecasting service in order to judge the quality of its currency forecasts.
Q4) Why would technical analysis not be useful if the international parity conditions held?
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Page 12
Chapter 11: International Debt Financing
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Q1) What are the three main sources of financing for any firm?
Q2) Which of the following represent liabilities to a bank?
A) deposits it accepts from its customers and securities it buys
B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital
C) the borrowing it does in security markets and the loans it provides
D) loans to customers
Q3) Why is there a need for international banking regulation?
Q4) Which kind of bond is a small but growing component of the international bond market and consists of two closely related securities?
A) international bond
B) domestic bond
C) equity-related bond
D) foreign bond
Q5) How is the final payment made for a dual-currency bond?
Q6) Banks that operate in the Eurocurrency markets are known as ________.
A) eurobanks
B) eurocredit banks
C) euronote banks
D) international banking facilities
Page 13
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Chapter 12: International Equity Financing
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Q1) Cross-listing of stocks and demutualization have led to the ________ of stock exchanges.
A) externalization
B) securitization
C) globalization
D) order-driven trading systems
Q2) The ________ that attempted to separate commercial from investment banking practices by banks in the U.S.has been dismantled in recent years
A) U.S. Securities Exchange Commission
B) Maastricht Treaty
C) Shelf Registration Act
D) Glass-Steagall Act
Q3) The stock markets of the least developed countries are called ________ markets. A) emerging
B) start-up
C) frontier
D) secondary
Q4) How are ADRs differentiated?
Q5) How have global stock markets adjusted to competitive pressure from global investors?
Page 14
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Chapter 13: International Capital Market Equilibrium
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Q1) To increase the Sharpe ratio for a portfolio,an investor would have to add which one of the following?
A) stocks that increase expected return of the portfolio
B) stocks that decrease expected return of the portfolio
C) stocks that increase the volatility of the portfolio
D) stocks that increase the correlation with other stocks in the portfolio
Q2) Which one of the following is the portfolio that maximizes the Sharpe ratio?
A) the one below the minimum-variance-efficient frontier
B) the one that lies on the minimum-variance-efficient frontier
C) the one above the minimum-variance-efficient frontier
D) the one that lies on the vertical axis of the minimum-variance-efficient frontier
Q3) What is the trend for the home bias phenomenon.
Q4) The portfolio on the minimum-variance frontier that maximizes the sharpe ratio is called
A) mean-variance frontier.
B) MVE portfolio
C) mean standard deviation frontier.
D) efficient frontier.
Q5) What are some benefits of a portfolio that is internationally diversified?
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Chapter 14: Country and Political Risk
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Q1) The Baker Plan of 1985 is named for the U.S.________.
A) secretary of state
B) president
C) federal reserve chair
D) treasury secretary
Q2) ________ are assessments of political and economic events produced by specialized organizations that that could aversely affect companies operating in a country.
A) Country risk premiums
B) Commercial risk ratings
C) Country risk ratings
D) Sovereign risk ratings
Q3) The Baker Plan of 1985 is most associated with A) the 1973 oil crisis.
B) the 1996 Mexican peso crisis.
C) the 2006 Bolivian government's expropriation of gas fields.
D) the 1980 debt crisis.
Q4) What political realities underlie a government budget deficit?
Q5) What is the difference between political risk and sovereign risk?
Q6) How might a government budget deficit lead to inflation?
Page 16
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Chapter 15: International Capital Budgeting
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Q1) The basic principal of capital budgeting is that ________ with a positive adjusted net present value should be accepted by the firm.
A) projects
B) investments
C) all cash flows
D) accounts receivable
Q2) What is meant by the cannibalization of an export market?
Q3) ________ refers to the possibility of export revenue when a foreign market is served by direct foreign investment and the former exports to that market are unable to be sold elsewhere.
A) Cannibalization of exports
B) Cannibalization of imports
C) Capital budgeting
D) Adjusted net present value
Q4) Can an investment project of a foreign subsidiary that has a positive net present value when evaluated as a stand-alone firm ever be rejected by the parent corporation? Assume that the parent accepts all projects with positive adjusted net present values.
Q5) How does the role of underwriting affect the issuing of securities?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) Because the cash flows from an international project may be denominated in different currencies from the headquarters,one of the very first decisions is to
A) do the valuation using forecasts of the foreign or home currency.
B) determine the salvage value at the terminal stage of the project.
C) calculate the stream of free cash flows.
D) arrange the financing in the foreign or domestic currency.
Q2) Growth does lead to increases in the firm's value,but only if the ________ exceeds the WACC does the firm's value increase by more than the amount of the investment.
A) return on investment
B) discount rate
C) plowback ratio
D) retention ratio
Q3) ________ occurs when managers refuse to take on low-risk projects because too much of the value from the project would accrue to the creditors.
A) Financial distress
B) A lack of plowback
C) Cannabilization of exports
D) Underinvestment
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Chapter 17: Risk Management and the Foreign Currency
Hedging
Decision
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Q1) If the tax code is convex and the forward rate equals the expected future spot rate,why would a firm prefer to pay taxes on the hedged value of a foreign currency cash flow rather than wait to pay the taxes on the realized foreign currency cash flow?
Q2) According to some research,firms with higher dividend payouts are more like to A) generate a tax-loss carry-forward.
B) incur financial distress.
C) hedge.
D) under-report their hedging activities.
Q3) Suppose that the value of a firm increases when the euro strengthens relative to the dollar,an appropriate hedge would be to
A) find another currency that is highly correlated to sell forward. B) buy euros forward.
C) liquidate euro liabilities.
D) convert some of the firm's debt into euros.
Q4) You work for a company where the CFO thinks that the value of the firm's assets fluctuate widely with the euro-dollar exchange rate does not want to hedge the firm's exchange rate risk because he thinks it is impossible.How can you convince him to hedge?
Q5) What are the gains from hedging foreign exchange risk?
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Chapter 18: Financing International Trade
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Q1) With a ________,the exporter retains title and control of the goods until the importer has paid for the goods.
A) sight draft
B) time draft
C) documentary collection
D) clean bill of lading
Q2) What is the name of the request for payment that is created when an importer asks its bank to write a letter to an exporter indicating that the importer's bank will honor the request?
A) draft
B) bill of lading
C) banker's acceptance
D) commercial invoice
Q3) What is the purpose of marine insurance?
Q4) Insurance policies that covers all of the exports of a firm are known as
A) umbrella policies.
B) floating policies.
C) clean policies.
D) multi-line policies.
Q5) What are the advantages of a documentary credit to an exporter and an importer?
Page 20
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Chapter 19: Managing Net Working Capital
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Q1) Using a centralized cash management system results in a decreased ________ cash demand.
A) transactions
B) long-term
C) precautionary
D) short-term
Q2) What is the term that refers to a firm's stock of cash,marketable securities,accounts receivable,and inventories?
A) working capital
B) cash
C) marketable securities
D) accounts receivable
Q3) To avoid paying the higher corporate tax to a foreign government,the rule states that a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible to lower tariff payments.
A) low
B) high
C) neutral
D) proportional
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Page 21
Chapter 20: Foreign Currency Futures and Options
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Q1) Which of the following conditions would be "in the money" for an American call option for foreign currency?
A) when the market price limits are reached and trading is halted
B) when the strike price is greater than the spot price
C) when the strike price is equal to the spot price
D) when the strike price is lower than the spot price
Q2) The hedging contract that gives the buyer the right,but not the obligation,to sell a specific amount of foreign currency with domestic currency is known as the ________.
A) call option
B) put option
C) American option
D) European option
Q3) What is the term for the revenue immediately generated from exercising a currency option?
A) open interest
B) leading payment
C) margin
D) intrinsic value
Q4) What effects does "marking to market" have on futures contracts?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) When a situation exists in which two corporations have headquarters in two different countries and each makes a loan of equivalent value to the subsidiary of the other company that operates in its country,we say ________ exists.
A) a lagging accounts receivable payment
B) a parallel loan
C) the right of offset
D) a back-to-back loan
Q2) An interest rate swap allows an MNC to change the nature of its debt from a ________.
A) fixed interest rate to a floating interest rate
B) local bank interest charge to a international bank interest charge
C) pegged currency exchange system to a floating currency exchange system
D) debt security to an equity security
Q3) The ________ is a trade organization that offers controls on the legal aspects of swaps.
A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) Securities Exchange Commission
D) International Swap and Derivatives Association
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