Description

 

INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

 

International Financial Management 13th Edition By Jeff Madura – Test Bank

 

 

Sample  Questions  

 

1. ​The commonly accepted goal of an MNC is to:

a. ​maximize short-term earnings.
b. ​maximize shareholder wealth.
c. ​minimize risk.
d. ​A and C.
e. ​maximize international sales.

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

2. ​With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.

a. ​shareholder wealth; short-term earnings
b. ​shareholder wealth; shareholder wealth
c. ​short-term earnings; sales volume
d. ​short-term earnings; shareholder wealth

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

3. ​For an MNC, agency costs are typically:

a. ​nonexistent
b. ​larger than agency costs of a small purely domestic firm.
c. ​smaller than agency costs of a small purely domestic firm.
d. ​the same as agency costs of a small purely domestic firm.

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

4. ​Which of the following could reduce agency problems for an MNC?

a. ​stock options as managerial compensation
b. ​hostile takeover threat
c. ​investor monitoring
d. ​all of the above are forms of corporate control that could reduce agency problems for an MNC.

 

ANSWER:   d
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

5. ​The valuation of an MNC should rise when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected
to ____.

a. ​decrease; appreciate
b. ​increase; appreciate
c. ​decrease; depreciate
d. ​increase; depreciate

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

6. ​Which of the following theories identifies specialization as a reason for international business?

a. ​theory of comparative advantage
b. ​imperfect markets theory
c. ​product cycle theory
d. ​none of the above

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

7. Which of the following theories identifies the nontransferability of resources as a reason for international business?

a. ​theory of comparative advantage
b. ​imperfect markets theory
c. ​product cycle theory
d. ​none of the above

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

8. ​Which of the following theories suggests that firms seek to penetrate new markets over time?

a. ​theory of comparative advantage
b. ​imperfect markets theory
c. ​product cycle theory
d. ​none of the above

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

9. ​An industry based on which of the following would most likely take advantage of lower costs in some less developed foreign countries?

a. ​assembly line production
b. ​specialized professional services
c. ​nuclear missile programs
d. ​development of more sophisticated computer technology

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

10. ​Due to the risks involved in international business, firms should:

a. ​only consider international business in major countries.
b. ​maintain international business to no more than 20% of total business.
c. ​maintain international business to no more than 35% of total business.
d. ​none of the above

 

ANSWER:   d
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

11. ​A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in a franchise in exchange for periodic fees.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

12. ​Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

13. ​The agency costs of an MNC are likely to be lower if it:

a. ​scatters its subsidiaries across many foreign countries.
b. ​increases its volume of international business.
c. ​uses a centralized management style.
d. ​A and B.

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

14. ​An MNC may be more exposed to agency problems if most of its shares are held by:

a. ​a few mutual funds.
b. ​a widely dispersed set of individual investors.
c. ​a few pension funds.
d. ​all of the above would prevent agency problems.

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

15. ​The Sarbanes-Oxley Act improved corporate governance of MNCs because it:

a. ​made executives more accountable for verifying financial statements.
b. ​eliminated stock options as a form of compensation.
c. ​tied executive compensation to firm performance.
d. ​placed a limit on the amount of funds that managers can spend.

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

16. ​MNCs can improve their internal control process by all of the following, except:

a. ​establishing a centralized database of information.
b. ​ensuring that all data are reported consistently among subsidiaries.
c. ​ensuring that the MNC always borrows from countries where interest rates are lowest.
d. ​using a system that checks internal data for unusual discrepancies.

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

17. ​Franchising is the process by which national governments sell state-owned operations to corporations and other investors.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

18. ​The parent of an MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

19. If a publicly traded MNC’s managers make poor decisions that reduce its value, that may encourage other firms to acquire the MNC.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

20. ​Institutional investors such as mutual funds or pension funds that have large holdings of an MNC’s stock do not normally want to take control of it and therefore have no influence over management of the MNC.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

21. ​Four MNCs generate the same level of sales. The MNC that ______________________would likely have the most direct foreign investment.

a. ​exports all of its products
b. ​produces and sells its products locally
c. ​imports products from unrelated firms in other countries and sells them locally
d. ​acquires a foreign firm that produces most of its products to be sold in that foreign country

 

ANSWER:   d
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

22. ​Which of the following is an example of direct foreign investment?

a. ​exporting to a country
b. ​establishing licensing arrangements in a country
c. ​purchasing existing companies in a country
d. ​investing directly (without brokers) in foreign stocks

 

ANSWER:   c
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

23. ​According to the text,  licensing allows a firm to:

a. ​import without being subject to government restrictions.
b. ​provide its technology for a fee.
c. ​export without government restrictions.
d. ​none of the above

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

24. ​Assume that an MNC purchases a foreign building, and then leases the building to another party and allows that party to operate the business in the building for 30 years if the party follows standards set by the MNC. This process is referred to as:

a. ​A foreign acquisition.
b. ​franchising.
c. ​a licensing agreement.
d. ​exporting.

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

25. ​Imperfect markets reflect conditions under which factors of production are immobile.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

26. ​The Sarbanes-Oxley Act (SOX), which was enacted in 2002, required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

27. ​If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

28. ​The valuation of an MNC is reduced if the required rate of return on its investments in foreign countries is reduced.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

29. ​Which of the following is not mentioned in the text as an additional risk resulting from international business?

a. ​exchange rate fluctuations
b. ​political risk
c. ​interest rate risk
d. ​exposure to foreign economies

 

ANSWER:   c
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

30. ​Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____.

a. ​a specialized sales or service strategy; its technology
b. ​its technology; a specialized sales or service strategy
c. ​its technology; its technology
d. ​a specialized sales or service strategy; a specialized sales or service strategy
e. ​its technology; an initial investment

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

31. ​Which of the following is not a way in which agency problems can be reduced through corporate control?

a. ​executive compensation
b. ​threat of hostile takeover
c. ​acquisition of a foreign subsidiary
d. ​monitoring by large shareholders

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

32. ​The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

33. ​A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

34. ​If a U.S. firm sets up a plant in Mexico to benefit from low-cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

35. ​Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

36. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

37. ​A centralized management style for an MNC results in relatively high agency costs.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

38. ​The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country’s resources.

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

39. ​If a U.S.-based MNC focused entirely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

40. MNCs commonly consider acquiring an existing foreign operation because the cost is less expensive than establishing a new subsidiary of the same size.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

41. ​If a U.S.-based MNC focused entirely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

42. If markets were perfect, then labor and other costs of production would be easily transferable.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

43. International trade:​

a. ​is a relatively conservative approach to foreign market penetration.
b. ​entails minimal risk.
c. ​does not require a large amount of investment.
d. ​all of the above.

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

44. Assume that an American firm wants to engage in international business without making a major investment in the foreign country. Which method is least appropriate in this situation?​

a. ​international trade
b. ​licensing
c. ​franchising
d. ​direct foreign investment

 

ANSWER:   d
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

45. The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

46. An MNC’s value depends on all of the following, except:​

a. ​the MNC’s required rate of return.
b. ​the amount of the MNC’s cash flows in a particular currency.
c. ​the exchange rate at which cash flows are converted to dollars.
d. ​all of the above factors

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

47. Which of the following is not an example of political risk?​

a. ​Government may impose taxes on a subsidiary.
b. ​Government may impose barriers on a subsidiary.
c. ​Consumers may boycott the MNC.
d. ​Consumers’ income levels may decrease, thus decreasing consumption.

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.05.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use the euro as their currency, this MNC is not subject to exchange rate risk.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

50. Compared to other methods of international business, international trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions. ​

a. ​higher; lower
b. ​higher; higher
c. ​lower; higher
d. ​lower; lower

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

51. Assume that Boca Co. wants to expand its business to Japan and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?​

a. ​joint venture
b. ​licensing
c. ​partial acquisition of an existing Japanese firm
d. ​establishment of a Japanese subsidiary

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

52. A decentralized management style results in relatively high agency costs for an MNC.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

53. MNCs commonly consider establishing a new foreign subsidiary to replace their exporting business because it allows them to avoid exchange rate risk.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, 200,000 Swiss francs from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc’s value and the euro’s value are expected to be $.83 and $1.29, respectively, at the end of this year. What are the expected dollar cash flows of Live Co?​

a. ​$200,000
b. ​$559,500
c. ​$582,500
d. ​$393,500

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could have caused this decline in value?​

a. ​a weaker Mexican economy
b. ​lower Mexican interest rates
c. ​depreciation of the Mexican peso
d. ​appreciation of the Mexican peso.

 

ANSWER:   c
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while Jensen establishes the new subsidiary and ____ when the subsidiary starts operations.​

a. ​depreciates; appreciates
b. ​appreciates; appreciates
c. ​appreciates; depreciates
d. ​depreciates; depreciates

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

57. A macroeconomic perspective focuses on the financial management decisions that affect the value of an MNC.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.05.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

58. In determining the valuation of foreign projects, an MNC will always use the same required rate of return as it would for its domestic projects.​

a. ​True
b. ​​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston’s expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are the expected dollar cash flows of Livingston Co.?​

a. ​$100,000
b. ​$200,000
c. ​$160,000
d. ​$60,000

 

ANSWER:   c
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary’s operations.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

65. The theory of comparative advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

66. Under the imperfect markets theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country’s resources.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

67. Under the product cycle theory, foreign demand can be initially satisfied by exporting.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

69. International trade is the most common form of direct foreign investment (DFI).​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

70. When the parent’s home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.​

a. ​True
b. ​False

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

72. One form of exposure to political risk is terrorism​

a. ​True
b. ​False

 

ANSWER:   a
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

73. The goal of an MNC is to:​

a. ​minimize taxes on funds remitted from foreign subsidiaries.
b. ​establish subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
c. ​maximize shareholder wealth.
d. ​maximize the social benefits resulting from actions such as the employment of foreign managers.

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

74. Agency costs faced by MNCs may be larger than those faced by purely domestic firms because:​

a. ​monitoring of managers located in foreign countries is more difficult.
b. ​foreign subsidiary managers raised in different cultures may not follow uniform goals.
c. ​MNCs are relatively large.
d. ​all of the above
e. ​A and B

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

75. Which of the following is not one of the more common methods used by MNCs to improve their internal control process?​

a. ​establishing a centralized database of information
b. ​ensuring that all data are reported consistently among subsidiaries
c. ​speeding the process by which all departments and all subsidiaries have access to the data that they need
d. ​making executives more accountable for financial statements by personally verifying their accuracy
e. ​All of the above are common methods used by MNCs to improve their internal control process

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

76. Which of the following is not mentioned in the text as a theory of international business?​

a. ​theory of comparative advantage
b. ​imperfect markets theory
c. ​product cycle theory
d. ​globalization of business theory
e. ​All of the above are mentioned in the text as theories of international business

 

ANSWER:   d
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

77. ​When conducting international business, firms generally face the most risk when they:

a. ​engage in franchising.
b. ​make acquisitions of existing operations.
c. ​establish new subsidiaries.
d. ​engage of international trade.
e. ​B and C

 

ANSWER:   a
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

78. The least risky method by which firms conduct international business is:​

a. ​franchising
b. ​acquisitions of existing operations.
c. ​international trade.
d. ​the establishment of new subsidiaries.
e. ​licensing

 

ANSWER:   c
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

79. Which of the following does not constitute a form of direct foreign investment?​

a. ​franchising
b. ​international trade
c. ​joint ventures
d. ​acquisitions of existing operations
e. ​establishment of new foreign subsidiaries

 

ANSWER:   b
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.01.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM .MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

1. Assume that a bank’s bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid/ask percentage spread is:​

a. ​about 4.44%.
b. ​about 4.26%.
c. ​about 4.03%.
d. ​about 4.17%.

 

ANSWER:   b
RATIONALE:   ​Bid/ask percentage spread = ($.47 – $.45)/$.47 = 4.26%
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

2. Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid/ask percentage spread is:​

a. ​about 4.99%.
b. ​about 4.88%.
c. ​about 4.65%.
d. ​about 4.43%.

 

ANSWER:   c
RATIONALE:   Bid/ask percentage spread = ($.0043 – $.0041)/$.0043 = 4.65%
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent.​

a. ​3 to 7
b. ​.01 to .03
c. ​10 to 15
d. ​.5 to 1

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

4. Which of the following is not a factor that affects the bid/ask spread?​

a. ​order costs
b. ​inventory costs
c. ​volume
d. ​All of the above factors affect the bid/ask spread

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

5. ​The forward rate is the exchange rate used for immediate exchange of currencies.

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

6. The ask quote is the price at which a bank offers to sell a currency.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

7. According to the text, the forward rate is commonly used for:​

a. ​hedging.
b. ​immediate transactions.
c. ​previous transactions.
d. ​bond transactions.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

8. If a U.S. firm is receiving 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could:​

a. ​purchase a 90-day forward contract on euros.
b. ​sell a 90-day forward contract on euros.
c. ​purchase euros 90 days from now at the spot rate.
d. ​sell euros 90 days from now at the spot rate.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

9. If a U.S. firm will need C$200,000 in 90 days to pay for imports from Canada and it wishes to avoid the risk from exchange rate fluctuations, it could:​

a. ​purchase a 90-day forward contract on Canadian dollars.
b. ​sell a 90-day forward contract on Canadian dollars.
c. ​purchase Canadian dollars 90 days from now at the spot rate.
d. ​sell Canadian dollars 90 days from now at the spot rate.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

10. Assume the Canadian dollar is equal to $.88 and the Peruvian nuevo sol is equal to $.35. The value of the Peruvian  nuevosol in Canadian dollars is:​

a. ​about .3621 Canadian dollars.
b. ​about .3977 Canadian dollars.
c. ​about 2.36 Canadian dollars.
d. ​about 2.51 Canadian dollars.

 

ANSWER:   b
RATIONALE:   ​$.35/$.88 = .3977
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

11. Which of the following is not true with respect to spot market liquidity?​

a. ​The more willing buyers and sellers there are, the more liquid a market is.
b. ​The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
c. ​A currency’s liquidity affects the ease with which an MNC can obtain or sell that currency.
d. ​If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

12. Forward markets for currencies of developing countries are:​

a. ​prohibited.
b. ​less liquid than markets for currencies of developed countries.
c. ​more liquid than markets for currencies of developed countries.
d. ​only available for use by government agencies.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

13. A forward contract can be used to lock in the ____ of a specified currency at a future point in time.​

a. ​purchase price
b. ​sale price
c. ​A or B
d. ​none of the above

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

14. The forward market:​

a. ​for euros is very illiquid.
b. ​for currencies of Eastern European countries is very liquid.
c. ​does not exist for some currencies.
d. ​none of the above

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

15. ____ is not a bank characteristic important to customers in need of foreign exchange.​

a. ​Quote competitiveness
b. ​Speed of execution
c. ​Forecasting advice
d. ​Advice about current market conditions
e. ​All of the above are important bank characteristics to customers in need of foreign exchange.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

16. The Basel III accord requires banks to:​

a. ​maintain higher levels of capital if they have riskier assets.
b. ​increase lending to less developed countries.
c. ​pay higher premiums for deposit insurance.
d. ​reduce their short-term loans.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

17. The international money market primarily concentrates on:​

a. ​short-term lending (one year or less).
b. ​medium-term lending.
c. ​long-term lending.
d. ​placing bonds with investors.
e. ​placing newly issued stock in foreign markets.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

18. The international credit market primarily concentrates on:​

a. ​short-term lending (less than one year).
b. ​medium-term lending.
c. ​credit cards for individuals.
d. ​providing an exchange of foreign currencies for firms that need them.
e. ​placing newly issued stock in foreign markets.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

19. The main participants in the international money market are:​

a. ​consumers.
b. ​small firms.
c. ​large corporations.
d. ​small European firms needing European currencies for international trade.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

20. LIBOR is:​

a. ​the interest rate commonly charged for loans between banks.
b. ​the average inflation rate in European countries.
c. ​the maximum loan rate ceiling on loans in the international money market.
d. ​the maximum deposit rate ceiling on deposits in the international money market.
e. the maximum interest rate offered on bonds that are issued in London.​

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

21. A syndicated loan:​

a. ​represents a loan by a single bank to a syndicate of corporations.
b. ​represents a loan by a single bank to a syndicate of country governments.
c. ​represents a direct loan by a syndicate of oil-producing exporters to a less developed country.
d. ​represents a loan by a group of banks to a borrower.
e. ​A and B

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

22. The international money market is primarily served by:​

a. ​the governments of European countries, which directly intervene in foreign currency markets.
b. ​government agencies such as the International Monetary Fund that promote development of countries.
c. ​several large banks that accept deposits and provide loans in various currencies.
d. ​small banks that convert foreign currency for tourists and business visitors.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

23. Which of the following is true of international money market securities?​

a. ​The securities may be exposed to exchange rate risk.
b. ​The securities are perceived to be very risky.
c. ​The securities issued by corporations are not subject to credit (default) risk.
d. ​The securities have a maturity of one to five years.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

25. From 1944 to 1971, the exchange rate between any two currencies was typically:​

a. ​fixed within narrow boundaries.
b. ​floating, but subject to central bank intervention.
c. ​floating, and not subject to central bank intervention.
d. ​nonexistent; that is, currencies were not exchanged, but gold was used to pay for all foreign transactions.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

26. As a result of the Smithsonian Agreement, the U.S. dollar was:​

a. ​the currency to be used by all countries as a medium of exchange for international trade.
b. ​forced to be freely floating relative to all currencies without any boundaries.
c. ​devalued relative to major currencies.
d. ​revalued (upward) relative to major currencies.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

27. According to the text, the average foreign exchange trading around the world ____ per day.​

a. ​equals about $200 billion
b. ​equals about $400 billion
c. ​equals about $700 billion
d. ​exceeds $4 trillion

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

28. Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.​

a. ​depreciate; buying
b. ​depreciate; selling
c. ​appreciate; selling
d. ​appreciate; buying

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

29. The bid/ask spread on an exchange rate can be used to directly determine:​

a. ​how an exchange rate will change.
b. ​the transaction cost of foreign exchange.
c. ​the forward premium.
d. ​the currency option premium.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

30. ​Futures contracts are typically ____; forward contracts are typically ____.

a. ​sold on an exchange; sold on an exchange
b. ​sold in an over-the-counter market; sold on an exchange
c. ​sold on an exchange; sold in an over-the-counter market
d. ​offered by commercial banks; offered by commercial banks

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

31. Eurobonds:​

a. ​are usually issued in bearer form.
b. ​typically carry several protective covenants.
c. ​cannot contain call provisions.
d. ​A and B

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

32. Which of the following is true?​

a. ​Non-U.S. firms may desire to issue bonds in the United States due to less regulation there.
b. ​U.S. firms may desire to issue bonds in the United States due to less regulation there.
c. ​U.S. firms may desire to issue bonds in non-U.S. markets due to less regulation in some other countries.
d. ​A and B

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

33. Eurobonds:​

a. ​can be issued only by European firms.
b. ​can be sold only to European investors.
c. ​A and B
d. ​none of the above

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

34. Which currency is used the most to denominate Eurobonds?​

a. ​the British pound
b. ​the Japanese yen
c. ​the U.S. dollar
d. ​the Swiss franc

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

35. When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations will be based on the:​

a. ​closing prices in the United States during the previous day.
b. ​closing prices in Canada during the previous day.
c. ​prevailing prices in locations where the foreign exchange markets are already open.
d. ​officially set by central banks before the U.S. market opens.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

36. The U.S. dollar is not accepted as a medium of exchange in:​

a. ​industrialized countries outside the United States.
b. ​in any Latin American countries.
c. ​in Eastern European countries where foreign exchange restrictions exist.
d. ​none of the above

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

37. Which of the following is not true regarding the Bretton Woods Agreement?​

a. ​It called for fixed exchange rates between currencies.
b. ​Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels.
c. ​The agreement lasted from 1944 until 1971.
d. ​Each country used gold to back its currency.
e. ​All of the above are true regarding the Bretton Woods Agreement.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?​

a. ​73.75.
b. ​125.
c. ​1.69.
d. ​0.014.
e. ​none of the above

 

ANSWER:   d
RATIONALE:   ​($.008/$.59) = F$.014/¥
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

39. Global regulations  prevent the internationalization of moeny markets.​

a. ​True
b.

False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

40. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

41. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

42. The Single European Act prevented a trend toward increased globalization in the banking industry.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

43. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

44. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

45. The strike price is also known as the premium price.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

46. The interest rate commonly charged for loans between banks is called the cross rate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

47. The Bretton Woods Agreement is an agreement to standardize banks’ capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

48. The Basel Accord is an agreement among the major European countries to make regulations on imports more uniform across European countries and to reduce taxes on goods traded between these countries.​

a. ​True
b.

False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

49. ​A currency futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

50. Eurobonds are certificates representing bundles of stock.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

51. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.​

a. ​$13.64
b. ​$15.00
c. ​$16.50
d. ​16.50 euros
e. ​none of the above

 

ANSWER:   c
RATIONALE:   15 ´ $1.10 = $16.50​
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.​

a. ​48.90
b. ​146.70
c. ​55.21
d. ​none of the above

 

ANSWER:   b
RATIONALE:   ​3 ´ 30 ´ $1.63 = $146.70
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

53. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

54. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

55. The preferences of corporations and governments to borrow in foreign currencies on a short-term basis and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

56. Large commercial banks play a major role in the international money market by accepting short-term deposits in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

57. ​The term LIBOR refers to international bonds that were issued in London.

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

58. The Greece credit crisis in the 2012-2015 period refers to Greece being unable to obtain loans from any banks or governments.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

59. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

60. As a result of the Sarbanes-Oxley Act, financial reporting costs were reduced, and many non-U.S. firms decided to place new issues of their stock in the United States.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

61. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

62. Shareholders have more voting power in some countries than in others.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

63. Shareholders can have influence on a wider variety of management issues in some countries than in others.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

64. The legal protection of shareholders is the same among countries.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

65. Shareholders in some countries may have more power to effectively sue publicly traded firms if their executives or directors commit financial fraud.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

66. In general, common-law countries such as the United States, Canada, and the United Kingdom allow for more legal protection of shareholders than civil-law countries such as France and Italy.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

67. The government enforcement of securities laws varies among countries.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

68. The degree of financial information that must be provided by public companies is the same in all countries.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

69. In general, stock markets allow for more governance and attract more investors when they have all of the following except:​

a. ​more voting rights for shareholders.
b. ​more legal protection for shareholders.
c. ​more enforcement of the laws.
d. ​less stringent accounting requirements.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

70. In general, investors are attracted to stock markets in countries that allow very limited voting rights for shareholders.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

71.  If companies cannot rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds.​

a. ​Derivative
b. ​bond
c. ​Money
d. ​foreign exchange

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

72. The strike price on a currency option is also known as the exercise price.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

73. Assume that the bank’s bid quote for the Mexican peso is $.126 and the ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000?​

a. ​12,600
b. ​775,194
c. ​793,651
d. ​12,900

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

74. When receiving quotations on a currency’s exchange rate, the bank’s bid quote is the rate at which the bank is willing to sell currency.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

75. An obligation to purchase a specific amount of currency at a specific exchange rate at a future point in time is called a:​

a. ​call option
b. ​spot contract
c. ​put option
d. ​forward contract
e. ​both B and D

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

76. Which of the following cannot be used to invest internationally?​

a. ​investment in MNC stocks
b. ​American depository receipts (ADRs)
c. ​exchange-traded funds (ETFs)
d. ​international mutual funds
e. ​All of the above can be used to invest internationally.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.App.
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

77. The interest rate in developing countries is usually very low.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

78. Assume that $1 is equal to .85 euros and 98 yen. The value of the yen in euros is​

a. ​.01
b. ​118
c. ​1.18
d. ​.0087

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

79. When obtaining a loan, the risk premium depends on the:​

a. ​risk-free interest rate of the borrower.
b. ​credit risk of the borrower.
c. ​borrower’s stock price.
d. ​lender’s stock price.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

80. Eurodollar deposits consisting of the oil revenues of oil-producing countries are known as:​

a. ​euros.
b. ​petro-euros.
c. ​petrodollars.
d. ​petro deposits.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

81. Which of the following is not true about syndicated loans?​

a. ​A borrower that receives a syndicated loan incurs various fees besides the interest rate.
b. ​The loans are only denominated in U.S. dollars.
c. ​The loans are provided by a group of banks to a borrower.
d. ​All of the above are true

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

82. ​The interest rate on the syndicated loan depends all of the following except:

a. ​currency denominating the loan.
b. ​maturity of the loan.
c. ​creditworthiness of the borrower.
d. ​loan provisions set by the International Monetary Fund

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation?​

a. ​Buy dollars forward.
b. ​Sell dollars forward.
c. ​Purchase call option.
d. ​Purchase put option.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

84. Certificates representing bundles of the stock of a non-U.S. firm are called:​

a. ​Eurobonds.
b. ​ADRs.
c. ​FRNs.
d. ​LIBOR certificates.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars?​

a. ​10
b. ​13.28
c. ​30.12
d. ​39.84

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

86. Which of the following is not true regarding ADRs?​

a. ​ADRs are denominated in the currency of the stock’s home country.
b. ​ADRs enable U.S. investors to avoid cross-border transactions.
c. ​ADRs allow non-U.S. firms to tap into the U.S. market for funds.
d. ​ADRs sometimes allow for arbitrage opportunities.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.05
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

87. The more intense the competition for a traded currency, the larger the bid/ask spread.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

88. The bid/ask spreads quoted on more liquid, heavily traded currencies are larger than the spreads on less liquid, less traded currencies.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

89. At any given point in time, a bank’s bid quote will be greater than its ask quote.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

90. An MNC with receivables in Japanese yen purchases yen forward to hedge its exposure to exchange rate fluctuations.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02

 

91. ​A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

92. The LIBOR varies among currencies because the market supply of and the demand for funds vary among currencies.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

93. The international money market is frequently accessed by MNCs for short-term investment and financing needs, while longer-term financing needs are met in the international credit market or the international bond market and in international stock markets.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.06
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

94. Which of the following is not a possible bid/ask quotation for the Barbados dollar?​

a. ​$.50/$.51
b. ​$.49/$.50
c. ​$.52/$.51
d. ​$.51/$.52
e. ​All of the above are possible bid/ask quotations.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?​

a. ​$44,500
b. ​$45,000
c. ​$526 million
d. ​$47,500
e. ​$556 million

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

96. Which of the following is probably not an example of the use of forward contracts by an MNC?​

a. ​Hedging pound payables by selling pounds forward
b. ​Hedging peso receivables by selling pesos forward
c. ​Hedging yen payables by purchasing yen forward
d. ​Hedging peso payables by purchasing pesos forward
e. ​All of the above are examples of using forward contracts.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Analysis

 

97. ​A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation.

a. ​direct; indirect
b. ​indirect; direct
c. ​direct; direct
d. ​indirect; indirect
e. ​cannot be answered without more information

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.​

a. ​direct; 142.86
b. ​indirect; 142.86
c. ​indirect; 150
d. ​direct; 150
e. ​indirect; 0

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

99. Which of the following is not true regarding electronic communications networks (ECNs)?​

a. ​They have a visible trading floor.
b. ​Trades are executed by a computer network.
c. ​They have been created in many countries to match orders between buyers and sellers.
d. ​They allow investors to place orders on their computers.
e. ​All of the above are true.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.App.
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

100. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables?​

a. ​Purchase pounds forward.
b. ​Buy a pound futures contract.
c. ​Buy a pound put option.
d. ​Buy a pound call option.

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

101. The process by which higher credit risk in one country is transmitted to another country is called:​

a. ​interest rate risk.
b. ​credit contagion.
c. ​.intermediation
d. ​negative cointegration

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

102. ​An MNC’s short-term financing decisions are satisfied in the ____ market, while its medium-term debt financing decisions are satisfied in the ____ market.

a. ​international money; international credit
b. ​international money; international bond
c. ​international credit; international money
d. ​international bond; international credit
e. ​international money; international stock

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.03.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

1. ​Which of the following forecasting techniques would be most likely to use today’s forward exchange rate to forecast the future exchange rate?

a. ​fundamental forecasting
b. ​market-based forecasting
c. ​technical forecasting
d. ​interval forecasting

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

2. ​Which of the following forecasting techniques would be most likely to use today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?

a. ​fundamental forecasting
b. ​market-based forecasting
c. ​technical forecasting
d. ​mixed forecasting

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

3. ​Which of the following forecasting techniques would be most likely to use relationships between economic factors and exchange rate movements to forecast the future exchange rate?

a. ​fundamental forecasting
b. ​market-based forecasting
c. ​technical forecasting
d. ​mixed forecasting

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

4. ​Which of the following forecasting techniques would be most likely to use the historical exchange rate data for the euro to predict the euro’s future exchange rate?

a. ​fundamental forecasting
b. ​market-based forecasting
c. ​technical forecasting
d. ​mixed forecasting

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

5. ​If a particular currency is consistently declining substantially over time, then a market-based forecast of a currency in a developed country will usually have:

a. ​underestimated the future exchange rates over time.
b. ​overestimated the future exchange rates over time.
c. ​forecasted future exchange rates accurately.
d. ​forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

6. ​Which of the following is true regarding forecast errors?

a. ​Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency.
b. ​Potential forecast errors may vary depending on the time horizon, the currency’s volatility, and whether the country issuing the currency is experiencing political problems.
c. ​Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries.
d. ​B and C

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

7. ​If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.

a. ​technical forecast technique
b. ​fundamental forecast technique
c. ​all of the above
d. ​none of the above

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

8. ​Which of the following is true?

a. ​Forecast errors cannot be negative.
b. ​Forecast errors are negative when the forecasted rate exceeds the realized rate.
c. ​Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
d. ​None of the above.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

9. ​Which of the following is true according to the text?

a. ​The forecast bias of a currency rarely shifts over time.
b. ​The absolute forecast error as a percentage of the realized value is a good measure to use in detecting a forecast bias.
c. ​Forecasting errors are smaller when focused on longer term periods.
d. ​None of the above.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

10. ​A fundamental forecast that uses multiple values of the influential factors is an example of:

a. ​sensitivity analysis.
b. ​discriminant analysis.
c. ​technical analysis.
d. ​factor analysis.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

11. ​When the value of an influential factor from the prior period affects the forecast in the future period, this is an example of a(n):

a. ​lagged input.
b. ​instantaneous input.
c. ​simultaneous input.
d. ​B and C

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

12. ​Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?

a. ​The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b. ​The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c. ​The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d. ​The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

13. ​Which of the following is not a limitation of fundamental forecasting?

a. ​uncertain timing of impact of some factors
b. ​forecasts needed for factors that have a lagged impact
c. ​omission of other relevant factors from the model
d. ​possible change in sensitivity of the forecasted variable to each factor over time
e. ​none of the above

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

14. ​Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent annualized. Today’s spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso’s spot rate if the five-year forward rate is used as a forecast?

a. ​$.131
b. ​$.226
c. ​$.262
d. ​$.140
e. ​$.174

 

ANSWER:   a
RATIONALE:   (1.05)5/(1.08)5 – 1 = -13%; $.20[1 + (-13%)] = $.174​
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

15. ​Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today’s spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

a. ​$.860.
b. ​$.848.
c. ​$.740.
d. ​$.752.

 

ANSWER:   d
RATIONALE:   $.80 ´ [1 + (-6%)] = $.752​
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

16. ​If today’s exchange rate reflects all relevant public information about the euro’s exchange rate, but not all relevant private information, then ____ would be refuted.

a. ​weak-form efficiency
b. ​semistrong-form efficiency
c. ​strong-form efficiency
d. ​A and B
e. ​B and C

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

17. According to the text, research generally supports ____ in foreign exchange markets.​

a. ​weak-form efficiency
b. ​semistrong-form efficiency
c. ​strong-form efficiency
d. ​A and B
e. ​B and C

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

18. 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:​

a. ​depreciation in the Australian dollar’s value over the next year.
b. ​appreciation in the Australian dollar’s value over the next year.
c. ​no change in the Australian dollar’s value over the next year.
d. ​information on future interest rates is needed to answer this question.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

19. If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:​

a. ​covered interest arbitrage is feasible.
b. ​the international Fisher effect (IFE) is supported.
c. ​the international Fisher effect (IFE) is refuted.
d. ​the average absolute error from forecasting would equal zero.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

20. Which of the following is not a forecasting technique mentioned in your text?​

a. ​accounting-based forecasting
b. ​technical forecasting
c. ​fundamental forecasting
d. ​market-based forecasting

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

21. ​The following regression model was estimated to forecast the value of the Indian rupee (INR):

INRt = a0 + a1INTt + a2INFt – 1 + mt,

where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the United States and India, and INF is the inflation rate differential between the United States and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = -.5; and a2 = .8. Assume that INFt – 1 = 2 percent. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome
30% -2%
40% -3%
30% -4%

The expected change in the Indian rupee in period t is:

a. ​3.40 percent.
b. ​0.40 percent.
c. ​3.10 percent.
d. ​1.70 percent.
e. ​none of the above

 

ANSWER:   a
RATIONALE:  
E[INTt] = (-.02)(.3) + (-.03)(.4) + (-.04)(.3) = -3.00%
INRt = .003 + (-.5)(-.03) + (.8)(.02) = 3.40%

POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

22. Gamma Corp. has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts are biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft 1 + mt,

where St is the spot rate of the pound in year t and Ft

1

is the forward rate of the pound in year

1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.

a. ​overestimated
b. ​underestimated
c. ​correctly estimated
d. ​none of the above

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

23. Which of the following is not a method of forecasting exchange rate volatility?​

a. ​using the absolute forecast error as a percentage of the realized value
b. ​using the volatility of historical exchange rate movements as a forecast for the future
c. ​using a time series of volatility patterns in previous periods
d. ​deriving the exchange rate’s implied standard deviation from the currency option pricing model

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

24. If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.​

a. ​weaken; delay
b. ​weaken; expedite
c. ​appreciate; expedite
d. ​none of the above

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

25. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.​

a. ​appreciate; depreciate
b. ​appreciate; appreciate
c. ​depreciate; depreciate
d. ​depreciate; appreciate

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

26. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.​

a. ​depreciate by .8 percent; today
b. ​depreciate by .8 percent; tomorrow
c. ​appreciate by .8 percent; today
d. ​appreciate by .8 percent; tomorrow

 

ANSWER:   b
RATIONALE:   et + 1 = (2%) ´ (-40%) = -0.8%
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

27. Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.03
KEYWORDS:   Bloom’s: Knowledge

 

28. ​

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:

eurot = b0 + b1INFt – 1 + b2INCt – 1
= .005 + .9INFt – 1 + 1.1INCt – 1

The most recent quarterly percentage change in the inflation differential between the United States and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the United States and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____ percent.

a. ​appreciation; 3.4
b. ​depreciation; 3.4
c. ​appreciation; 0.7
d. ​appreciation; 1.2

 

ANSWER:   d
RATIONALE:   eurot = .005 + .9(.02) + 1.1(-.01) = 1.2%​
POINTS:   1
DIFFICULTY:   Moderate
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

29. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.​

a. ​1.02
b. ​1.03
c. ​1.04
d. ​none of the above

 

ANSWER:   c
RATIONALE:  

E(St + 1) = $1.03(1.0097) = $1.04

POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

30. If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____ percent.​

a. ​1.90
b. ​2.00
c. ​-1.87
d. ​none of the above

 

ANSWER:   a
RATIONALE:   E(e) = 1.07/1.05 – 1 = 1.90%
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

31. 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.​

a. ​spot; high
b. ​spot; low
c. ​forward; high
d. ​forward; low

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

32. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and the spot rate will provide ____ forecasts.​

a. ​substantial; similar
b. ​substantial; very different
c. ​close to zero; similar
d. ​close to zero; very different

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

33. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.​

a. ​technical
b. ​fundamental
c. ​market-based
d. ​none of the above

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

34. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____ percent.​

a. ​9.6
b. ​-9.6
c. ​8.8
d. ​-8.8

 

ANSWER:   c
RATIONALE:  
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

35. The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.​

a. ​lower; volatile
b. ​higher; stable
c. ​lower; stable
d. ​none of the above

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

36. ​If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.

a. ​weak-form
b. ​semistrong-form
c. ​strong-form
d. ​all of the above

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

37. Foreign exchange markets are generally found to be at least ____ efficient.​

a. ​weak-form
b. ​semistrong-form
c. ​strong form
d. ​none of the above

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

38. MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

39. If the pattern of currency values over time appears random, then technical forecasting is appropriate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

40. Inflation and interest rate differentials between the United States and foreign countries are examples of variables that could be used in fundamental forecasting.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

41. A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

42. The most sophisticated forecasting techniques provide consistently accurate forecasts.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

43. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

44. Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

45. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

46. ​The closer graphical points are to the perfect forecast line, the better the forecast.

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

47. Foreign exchange markets appear to be strong-form efficient.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

48. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

49. Two methods for assessing exchange rate volatility are to use the volatility of historical exchange rate movements and to derive the exchange rate’s implied standard deviation from the currency option pricing model.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.04
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

50. Market-based forecasting involves the use of historical exchange rate data to predict future values.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

51. Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

52. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

53. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

54. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

55. ​If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today’s exchange rates.

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

56. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

57. The potential forecast error is larger for currencies that are more volatile.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

58. A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

59. In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

60. Monson Co., based in the United States, exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.​

a. ​higher; to hedge
b. ​lower; not to hedge
c. ​higher; not to hedge
d. ​none of the above

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

61. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

62. Which of the following is not a limitation of technical forecasting?​

a. ​It’s not suitable for long-term forecasts of exchange rates.
b. ​It doesn’t provide point estimates or a range of possible future values.
c. ​It cannot be applied to currencies that exhibit random movements.
d. ​It cannot be applied to currencies that exhibit a continuous trend for short-term forecasts.

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

63. The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD):

AUDt = a0 + a1INTt + a2INFt – 1 + mt,

where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = -.8; and a2 = .5. Assume that INFt – 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

 

Probability Possible Outcome
20% -3%
80% -4%

There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____.

a. ​4.5 percent; 6.1 percent
b. ​6.1 percent; 4.5 percent
c. ​4.5 percent; 5.3 percent
d. ​none of the above

 

ANSWER:   c
RATIONALE:  
Probability 20% = .001 + (-.8)(-.03) + (.5)(.04) = 4.5%
Probability 80% = .001 + (-.8)(-.04) + (.5)(.04) = 5.3%

POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

64. Purchasing power parity is used in:​

a. ​technical forecasting.
b. ​fundamental forecasting.
c. ​market-based accounting.
d. ​all of the above.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

65. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.​

a. ​higher; buy; upward
b. ​higher; sell; downward
c. ​higher; sell; upward
d. ​lower; buy; upward

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

66. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.​

a. ​lower; sell; upward
b. ​lower; sell; downward
c. ​higher; sell; upward
d. ​higher; sell; downward

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

67. Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:​

a. ​appreciation of yen’s value over the next year.
b. ​depreciation of yen’s value over the next year.
c. ​no change in yen’s value over the next year.
d. ​information about interest rates is needed to answer this question.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

68. Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:​

a. ​appreciation of the pound’s value over the next year.
b. ​depreciation of the pound’s value over the next year.
c. ​no change in the pound’s value over the next year.
d. ​not enough information to answer this question.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

69. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.​

a. ​weak-form
b. ​semistrong-form
c. ​strong-form
d. ​all of the above

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

70. If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:​

a. ​weak-form efficient.
b. ​semistrong-form efficient.
c. ​strong-form efficient.
d. ​all of the above.

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

71. Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased:

St = a0 + a1Ft – 1 + mt,

where St is the spot rate of the yen in year t and Ft1 is the forward rate of the yen in year t – 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate.

a. ​overestimated
b. ​underestimated
c. ​correctly estimated
d. ​none of the above

 

ANSWER:   a
RATIONALE:   ​{[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]} ´ $.84 = $.856
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

72. Assume that U.S. interest rates for the next three years are 5 percent, 6 percent, and 7 percent, respectively. Also assume that Canadian interest rates for the next three years are 3 percent, 6 percent, and 9 percent. The current Canadian spot rate is $.840. What is the approximate three-year forecast of the Canadian dollar’s spot rate if the three-year forward rate is used as a forecast?​

a. ​$.840
b. ​$.890
c. ​$.856
d. ​$.854

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Application

 

73. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?​

a. ​to decide in which foreign market to invest excess cash
b. ​to decide where to borrow at the lowest cost
c. ​to determine whether to require a subsidiary to remit funds or invest them locally
d. ​to speculate on exchange rate movements

 

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.01
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

74. Sensitivity analysis allows for all of the following except:​

a. ​accountability for uncertainty.
b. ​focus on a single point estimate of future exchange rates.
c. ​development of a range of possible future values.
d. ​consideration of alternative scenarios.

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

75. If graphical points lie above the perfect forecast line, then the forecast overestimated the future value.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

76. A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the United States and Canada was -0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.​

a. ​increases; increases
b. ​decreases; increases
c. ​increases; decreases
d. ​decreases; decreases

 

ANSWER:   c
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Comprehension

 

77. Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

78. Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

79. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

80. Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

81. The ideal currency for short-term deposits by an MNC will exhibit a high interest rate and appreciate over the investment period.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

82. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero, meaning that the forward rate and the spot rate will provide similar forecasts.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

83. Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.​

a. ​True
b. ​False

 

ANSWER:   a
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.02
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge

 

84. Forecast errors tend to be large for short forecast horizons.​

a. ​True
b. ​False

 

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   INFM.MADU.15.09.03
NATIONAL STANDARDS:   United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:   United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:   Bloom’s: Knowledge