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Question 1
The Fisher effect is used to determine the:
Answer
real inflation rate.
real interest rate.
real spot rate.
real forward rate.
5 points
Question 2
Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
Answer
If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen.
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If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.
5 points
Question 3
Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.
Answer
3.43%
5.68%
6.5%
7.3%
5 points
Question 4
Which of the following is indicated by research regarding purchasing power parity (PPP)?
Answer
PPP clearly holds in the short run.
Deviations from PPP are reduced in the long run.
PPP clearly holds in the long run.
There is no relationship between inflation differentials and exchange rate movements in the short run or long run.
5 points
Question 5
Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.
Answer
appreciate; 3%
appreciate; 1%
depreciate; 3%
depreciate; 2%
appreciate; 2%
5 points
Question 6
Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
Answer
depreciation in the Australian dollar's value over the next year.
appreciation in the Australian dollar's value over the next year.
no change in the Australian dollar's value over the next year.
information on future interest rates is needed to answer this question.
5 points
Question 7
If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.
Answer
spot; high
spot; low
forward; high
forward; low
5 points
Question 8
Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.
Answer
appreciate; 16.22
depreciate; 16.22
appreciate; 6.66
depreciate; 6.66
5 points
Question 9
Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
Answer
$.840
$.890
$.856
$.854
5 points
Question 10
Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate?
Answer
fundamental forecasting.
market-based forecasting.
technical forecasting.
mixed forecasting.
5 points
Question 11
Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:
Answer
benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.
be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.
5 points
Question 12
____ is (are) not a determinant of translation exposure.
Answer
The MNC's degree of foreign involvement
The locations of foreign subsidiaries
The local (domestic) earnings of the MNC
The accounting methods used
5 points
Question 13
One argument for exchange rate irrelevance is that:
Answer
MNCs can hedge exchange rate exposure much more effectively than individual investors.
investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
purchasing power parity does not hold very well.
MNCs are typically not diversified across numerous countries.
5 points
Question 14
Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.
Answer
increase; decrease
decrease; increase
increase; stay the same
stay the same; stay the same
5 points
Question 15
Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.
Answer
favorably; stronger
favorably; weaker
not; stronger
not; weaker
5 points
Question 16
Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
Answer
$1,000,000.
$1,055,602.
$1,000,830.
$1,045,644.
5 points
Question 17
Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
Answer
sell euros forward.
purchase euro currency put options.
purchase euro currency call options.
purchase euros forward.
remain unhedged.
5 points
Question 18
Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
Answer
sell euros forward
purchase euro currency put options.
purchase euro currency call options.
purchase euros forward.
remain unhedged.
5 points
Question 19
A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
Answer
the foreign currency; U.S.
the foreign currency; foreign country
dollars; foreign country
dollars; U.S.
5 points
Question 20
Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:
Answer
positive.
negative.
positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
zero.
5 points
Question 21
Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.
Answer
favorably; favorably
favorably; adversely
adversely; favorably
adversely; adversely
5 points
Question 22
Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.
Answer
increase; increase
decrease; increase
decrease; decrease
increase; decrease
increase; be unaffected
5 points
Question 23
Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.
Answer
tax deductible; not taxed
not tax deductible; not taxed
not tax deductible; taxed
tax deductible; taxed
5 points
Question 24
Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.
Answer
loss; smaller
loss; larger
gain; larger
gain; smaller
5 points
Question 25
If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.
Answer
benefit; weakens
be unaffected; weakens
be unaffected; strengthens
benefit; strengthens
5 points
Question 26
Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.
Answer
increase; postpone remitting earnings until the euro weakens
decrease; postpone remitting earnings until the euro weakens
decrease; remit earnings immediately before the euro weakens
increase; remit earnings immediately before the euro weakens
5 points
Question 27
From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:
Answer
is the top point.
is the point closest to the vertical axis.
is the point half way between the two end points.
cannot be determined since firms vary in their willingness to accept risk.
5 points
Question 28
To fully benefit from economies of scale, an MNC should:
Answer
establish a subsidiary in a new market that can sell products produced elsewhere.
establish a subsidiary in a market that has relatively low costs of labor or land.
establish a subsidiary in a market where raw materials are cheap and accessible.
participate in a joint venture in order to learn about a production process or other operations.
5 points
Question 29
Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
Answer
Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
Host governments generally perceive DFI as a remedy to eliminate a country's political problems.
The ability of a host government to attract DFI is dependent on the country's markets and resources.
Some types of DFI will be more attractive to some governments than to others.
5 points
Question 30
Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?
Answer
Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
Host governments generally perceive DFI as a remedy for their national problems.
The ability of a host government to attract DFI is dependent on the country's markets and resources.
Some types of DFI will be more attractive to some governments than to others.
5 points
Question 31
According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:
Answer
a risk-adjusted discount rate.
a payback period.
certainty equivalents.
simulation.
5 points
Question 32
An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.
Answer
positively; positively
positively; negatively
negatively; positively
negatively; negatively
5 points
Question 33
Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.
Answer
appreciate; low
appreciate; high
depreciate; high
depreciate; low
5 points
Question 34
The required rate of return of a project is ____ the MNC's cost of capital.
Answer
greater than
less than
the same as
any of the above, depending on the specific project
5 points
Question 35
A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2 through 5.
Answer
depreciates; depreciates
appreciates; appreciates
depreciates; appreciates
appreciates; depreciates
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