Chapter 1 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Globalization and

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Since the EU accession, many Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. However, as the forint (the Hungarian currency) was falling against the euro and Swiss franc, the cost of the mortgage payments in terms of the forint increased sharply, forcing many borrowers to default. This is an example of exposure to Need a Hint? A) B) C) D) exchange rate risk. political risk. market imperfections. weakness in the dollar.
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If a country unexpectedly imposes restrictions on imported goods, this trade barrier is an example of Need a Hint? A) B) C) D) exchange rate risk. political risk. a market imperfection. an expanded opportunity set.
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A domestic firm that produces and sells its products in one country Need a Hint? A) B) C) D) is protected from foreign exchange risk. could face foreign exchange risk. can face no political risk. is an example of a market imperfection.
4 4

A fundamental goal of sound business management is Need a Hint?

A) B) C) D)

shareholder wealth maximization. market share maximization. growth in sales. increasing the size of the firm.
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The European Central Bank is located in Need a Hint? A) B) C) D) Dsseldorf, Germany. Frankfurt, Germany. London, England. Paris, France.
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The theory of comparative advantage states that Need a Hint? economic well-being is enhanced if countries produce those goods for which they have comparative advantage and then trade those goods for goods that they do not enjoy a comparative advantage in A) producing. economic well-being is enhanced if countries consume those goods for which they have a comparative B) advantage and then trade for those goods. tariffs and other protectionist measures can enhance the mercantile success of countries that adopt C) them. countries should first produce the goods and services that they need, and then produce goods for D) export.
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The euro is Need a Hint? A) B) C) D) the common currency of Europe. an imaginary market basket of currencies. an index of the value of 12 European currencies relative to the U.S. dollar. pegged to the U.S. dollar at a fixed exchange rate of parity.
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The North American Free Trade Agreement (NAFTA)

Need a Hint?

A) B)

has caused massive unemployment in the United States as jobs went overseas. calls for the introduction of a regional currency called the amero, similar to the euro, by 2015.

is an agreement among the United States, Canada, and Mexico that calls for the phasing out of tariffs C) and import quotas over a 15-year period. D) calls for the privatization of all industries in Mexico over a 15-year period.
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A U.S. investor who is interested in the shares of Nokia Corporation of Finland Need a Hint? A) should probably stick with U.S. companies.

will be able to easily investigate the company, due to the ready flow of information over the Internet B) and the globalization of capital markets. C) D) must travel to Finland in person, or send a representative personally, to buy the shares. can buy the shares but cannot bring them to the U.S. legally.
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10

The dominant world currency since the end of World War II has been the Need a Hint? A) B) C) D) U.S. dollar. Canadian dollar. British pound. euro.

Chapter 2 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

International Mone 2

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Suppose the United States and Great Britain are on the gold standard and the price of gold in the U.S. is fixed at $100 per ounce and the price of gold in Britain is fixed at 50 per ounce. What exchange rate should prevail between the dollar and the pound? Need a Hint? A)1 = $2

B)2 = $1 C)1 = $0.50 There is not enough information to make a determination.

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D)

Gresham's law states that Need a Hint? A)exchange rates between currencies must equal the ratio of the price of gold in the two countries. B)good money drives bad money out of circulation. C)bad money drives good money out of circulation. the pricespecieflow mechanism will automatically adjust exchange rates to their correct level.
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D)

The key argument(s) in favor of flexible exchange rates rests on Need a Hint? A)easier external adjustments. B)national policy autonomy C)Both A and B are correct. None of the above.
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D)

Suppose that the British pound is pegged to gold at 20 per ounce and the U.S. dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you best take advantage of this situation? Need a Hint? A)Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to 200 at 20 per ounce. Exchange the 200 for dollars at the current rate of $1.80 per pound to get $360. B)Start with 350. Buy 17.5 ounces of gold at 20 per ounce. Convert the gold to dollars at $35 per ounce. Exchange the dollars for pounds at the current market exchange rate is $1.80 per pound. C)Both A and B are correct. None of the above.
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D)

The single European currency is called the Need a Hint? A)Eurodollar. B)euro. C)EMU, or European Monetary Unit. SDR.
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D)

Which of the following is true since the introduction of a single European currency? Need a Hint? A)National currencies such as the French franc and German mark are no longer independent currencies. The euro is now the sole legal tender in these countries. B)European countries still produce their national currencies, but the exchange rates are pegged to the euro. C)Countries must now buy their currencies from the German central bank. None of the above.
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D)

The euro is Need a Hint? A)the common currency of Europe. B)an imaginary market basket of 12 European currencies C)an index of the value of 12 European currencies relative to the U.S. dollar. pegged to the U.S. dollar at a fixed exchange rate of parity.
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D)

One advantage of the European Monetary Union (EMU) is Need a Hint? A)the loss of national monetary and exchangerate political independence. B)the transition of asymmetric macroeconomic shocks. C)reduced transaction costs and the elimination of exchangerate uncertainty. enhanced control of interest rates in the member countries.

D)
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A fixed exchange rate regime Need a Hint? A)forces a country to give up free international flows of capital. B)can eliminate exchange rate uncertainty. C)forces a country to abandon independent monetary policy. is the model used by the U.S. Federal Reserve.
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D)

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The dominant world currency since the end of World War I has been the Need a Hint? A)U.S. dollar. B)Canadian dollar. C)British pound. euro.

D)

Chapter 3 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Balance of Payme 3

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In a fixed exchange rate regime, a country can run a balanceofpayments surplus or deficit by increasing or decreasing Need a Hint? A) B) C) D) the country's official reserves. the balance on the capital account. the balance on the current account. the trade deficit.
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In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime, Need a Hint? A) B) C) D) BCA = BKA. BCA = BRA = 0 BKA = BRA BSA = BCA
3 4

In balanceofpayments accounting, a country's international transactions can be grouped into three main categories: Need a Hint? A) B) C) D) the current account, the capital account, and the federal reserves account. the government spending account, the capital account, and the official reserves account. the current account, the capital account, and the official reserves account the current account, the capital account, and the payments account.
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If the United States imports more than it exports, Need a Hint? A) B) C) D) the U.S. dollar would be likely to appreciate against other currencies. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. the U.S. dollar would be under pressure to depreciate against other currencies. Both B and C are correct.
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The Jcurve effect shows Need a Hint? A) B) C) the initial deterioration and eventual improvement of the trade balance following a depreciation. the initial improvement and eventual deterioration of the trade balance following a depreciation. that both imports and exports are responsive to exchange rate changes, but only in the short run. None of the above.

D)
6 4

The capital account measures Need a Hint? A) B) the difference between U.S. exports and imports of goods and services. the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and C) SDRs. D) the amount of currency in the Federal Reserve vault.
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If a country must make a net payment to foreigners because of a balanceofpayments deficit, the country can Need a Hint? A) B) C) D) increase its official reserve assets, such as SDRs. borrow anew from foreigners. print more currency. buy their currencies back from the World Bank.
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Suppose that a U.S. firm imports bicycles from Mercian Bicycles in Derby, England. Which of the following statements is thus true? Need a Hint? A) B) The transaction will give rise to a debit in the U.S. balanceofpayments. The transaction will give rise to a credit in the U.S. balanceofpayments.

Since the value of the bicycles will equal the value of the dollars sent abroad, this will give rise to C) neither a debit nor a credit in the U.S. balanceofpayments. D) None of the above.
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Invisible trade is another name for Need a Hint? A) B) offthebooks, or illegal, trade. statistical discrepancy.

C) D)

services. The official reserves account.

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10

The world's largest debtor and creditor nations are, respectively, Need a Hint? A) B) C) D) Japan and the United States. the United States and Japan. the United States and Canada. Great Britain and Mexico.

Chapter 4 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Corporate Govern 4

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When large shareholders have control over a corporation, Need a Hint? there is a possibility that the large shareholders control the managers and incentivise them to A) expropriate wealth from small outside shareholders. B) C) D) there are no agency costs. the shareholders are usually obese. All of the above.
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Many companies have provided managers with executive stock options, which Need a Hint? A) B) are a form of incentive contracts. can serve as a mechanism of aligning the interests of shareholders and managers.

can offer managers an incentive to run the company in such as way that enhances shareholder wealth C) as well as their own. D) All of the above.
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Which of the following statements is true regarding free cash flow? Need a Hint? It represents a firm's internally generated funds in excess of the amount needed to undertake all A) profitable investment projects. B) C) D) It tends to be highest in mature industries with low future growth prospects. It represents a temptation to managers. All of the above.
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In the United States, shareholders of a corporation elect Need a Hint? A) B) C) D) the board of directors. the president shareholder. the management of the firm. None of the above.
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Borrowing, and the subsequent obligation to make interest payments on time, serves Need a Hint? A) B) C) D) to create free cash flow. as an example of the agency costs of debt. to ameliorate the agency costs of equity, up to a point. None of the above.
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Suppose a U.S. company continually performs poorly and all of its internal governance mechanisms fail to correct the problem. What will happen in this situation? Need a Hint? A) B) C) D) Over time an outsider (corporate raider) will be prompted to mount a takeover bid. A hostile takeover bid can occur as a drastic governance mechanism of the last resort. The market for corporate control may discipline managers. All of the above.

10

Studies report that foreign firms listed in the United States are valued more than those from the same countries that are not listed in the United States. This is seen because Need a Hint? firms listed in the United States can take better advantage of growth opportunities and controlling A) shareholders cannot extract as many private benefits. B) C) D) foreign firms in mature industries with limited growth opportunities are most likely to seek U.S. listings of a reduction in exchange rate uncertainty. All of the above.
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Poor investor protection results in Need a Hint? A) B) C) D) concentrated ownership, underdeveloped capital markets, and slower economic growth. greater judicial activism. higher stock returns. None of the above.
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Companies domiciled in countries with weak investor protection Need a Hint? A) B) may need to have concentrated ownership as a substitute for legal protection. can enjoy higher free cash flow in the long term.

may experience a higher rate of economic growth than otherwiseidentical firms domiciled in countries C) with strong investor protection. D) All of the above.
10 4

10

The greatest advantage of the corporate form of business organization is Need a Hint? A) B) C) the efficient risk sharing that allows corporations to raise large amounts of capital. the potential for abuse of power that resides in the chief executives' offices. the benefit (to governments) of double taxation.

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Chapter 5 Multiple Choice Quiz

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D)

None of the above.

Multiple Choice Q 1

no 4

The Market for Fo

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Suppose you observe the following exchange rates: 1 = $1.25 and 1 = $2.00. What would be the euro pound exchange rate? Need a Hint? A) B) C) D) 1 = 1.60 1 = 0.625 2.50 = 1 1 = 2.50
2 4

Suppose you observe the following exchange rates: 1 = $.85; 1 = $1.60, and 2.00 = 1.00. How can you best make money if you start with $1,000,000? Need a Hint? Exchange $1M for pounds at 1 = $1.60. Next, exchange for euros at 2 = 1.00. Finally, exchange A) for dollars at 1 = $.85. Exchange $1M for euros at 1 = $.85. Next, exchange for pounds at 2.00 = 1.00. Finally, exchange B) for dollars at 1 = $1.60. C) D) Start with euros; exchange for pounds; exchange for dollars; exchange for euros. No arbitrage profit is possible.
3 4

Considering the spot and forward rate quotations for the Swiss franc below, which of the following statements is true?

Need a Hint? A) B) The Swiss franc is definitely going to be worth more dollars in six months. The Swiss franc is probably going to be worth less in dollars in six months

12

C) D)

The Swiss franc is trading at a forward discount. The Swiss franc is trading at a forward premium.
4 4

Considering the spot and forward rate quotations for the Swiss franc below, calculate the three month forward premium in American terms. Assume 30day months and 360day years.

Need a Hint? A) B) C) D) 0.0353 0.4235 0.1364 0.1412

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In the forward market, market participants agree to Need a Hint? A) B) C) D) buy or sell foreign currency in the future at prices agreedupon today. buy (but not sell) foreign currencies in the future at prices agreedupon today. pay today for a specific amount of foreign currency to be received in the future. buy and sell fixed amounts of foreign currency at spot prices that will prevail in the future.
6 4

Consider a trader who takes a long position in a sixmonth forward contract on the euro. The forward rate is $1.75 = 1.00 and the contract size is 62,500. At the maturity of the contract the spot exchange rate is $1.65 = 1.00. In this situation the trader has Need a Hint? A) B) C) lost $625. lost $6,250. made $6,250.

13

D)

lost $66,287.88.
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An exchange rate quoted in American terms Need a Hint? A) B) C) D) explains how many units of foreign currency you get for one U.S. dollar. explains how many U.S. dollars one unit of foreign currency is worth. is the same as the indirect quotation. is the same as the direct quotation.
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The spot and forward foreign exchange market is Need a Hint? A) B) C) D) E) an overthecounter market. open 24/7 somewhere in the world. the largest and most active financial market in the world. All of the above. None of the above.
9 4

The current spot exchange rate is $1.45/ and the threemonth forward rate is $1.55/. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/ in three months. Assume that you would like to buy or sell 100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct? Need a Hint? A) B) C) D) Take a short position in a forward contract on 100,000. If youre right you will make $15,000. Take a long position in a forward contract on 100,000. If youre right you will make $5,000. Take a short position in a forward contract on 100,000. If youre right you will make $5,000. Take a long position in a forward contract on 100,000. If youre right you will make $15,000.
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10

Restate the following one, three, and sixmonth outright forward American term bidask quotes in forward points.

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Need a Hint? A)

B)

C)

Chapter 6 Multiple Choice Quiz

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D)

None of the above.

Multiple Choice Q 1

no 4

International Parit

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Suppose interest rates in the United States are 9.2% when the spot exchange rate is $1.55 = 1 and the interest rate in the euro zone is 5% per year. What must the one-year forward exchange rate be? Need a Hint? A) B) C) D) $1.612 = 1 $0.6203 = 1 $1 = 1.612 $1.4904 = 1
2 4

Due to the integrated nature of their capital markets, investors in both the United States and United Kingdom require the same expected real interest rate of 3%. Expected annual inflation is 2% in the U.S. and 5% in the U.K. The spot exchange rate is currently 1.00 = $1.80. What are the nominal interest rates in the U.K. and the U.S., assuming the Fisher effect holds?

15

Need a Hint?

A) B) C) D)

3.0% in both countries. 8.15% in the U.K. and 5.06% in the U.S. 2.0% in the U.K and 1.0% in the U.S. 5.0% in the U.K. and 8.0% in the U.S.
3 4

Suppose U.S. inflation is 3%, U.K. inflation is 6%, and the spot exchange rate is 1 = $2. What is your estimate of the exchange rate expected to prevail in 3 years? Need a Hint? A) B) C) D) 1 = $2.1855 1 = $2.00 1 = $1.8349 1 = $1.943
4 4

Suppose that the spot exchange rate for Japanese yen is 122/$ and that the one-year forward exchange rate for Japanese yen is 130/$. The one-year interest rate in the United States is 5%. What is the interest rate in Japan? Need a Hint? A) B) C) D) 11.89% 6.56% 3.28% 1.67%
5 4

Based on the exchange rate quotations below from The Wall Street Journal, which area has the highest nominal interest rates?

16

Need a Hint? A) B) C) D) Britain. The United States. The euro zone. There is not enough information to say.
6 4

Suppose you observe an exchange rate of S($/SFr) = 0.85 (i.e., SFr 1 = $.85). The one-year forward rate is F1($/SFr) = 0.935 (i.e., SFr 1 = $.935). The risk-free interest rate is 5% in the U.S and 2% in Switzerland. How can a dollar-based investor make money? Need a Hint? Borrow dollars in the U.S., exchange for Swiss francs, and invest in Switzerland. In one year, translate A) the Swiss francs back into dollars. Borrow Swiss francs, translate into dollars at the spot, and invest in the U.S. at 5% for one year. At the end of the year, translate part of your dollar investment back into Swiss francs at the forward rate B) to repay your Swiss franc debt. Borrow dollars in the U.S., exchange for Swiss francs, invest in Switzerland, and enter into a one-year forward contract to sell francs for dollars. In one year, translate the Swiss francs back into dollars at C) the forward rate. D) There are no profitable arbitrage opportunities.
7 4

Suppose you observe the following exchange rates: S($/) = 1.50 (i.e., 1 = $1.50). The one-year forward rate is F1($/) = 1.55 (i.e., 1 = $1.55). The risk-free interest rate is 5% in the U.S. and 2.5% in the euro zone. How can a euro-based investor (with good credit at home and abroad) make money? Need a Hint? Borrow $1,000 in the U.S. at 5%, exchange for euros at the spot rate, and invest in the euro zone at A) 2.5%. At the end of one year, buy $1,050 with euro. Borrow 1,000, translate into dollars at the spot, and invest in the U.S. at 5% for one year. At the end of the year, translate your dollar investment back into euros at the forward rate to repay your euro B) debt. Borrow $1,000 in the U.S. at 5%, exchange for euros at the spot rate, and invest in the euro zone at 2.5%. Enter into a short forward contract to buy $1,050 at .6452 per $. In one year, exchange C) 677.42 back into $1,050 at the forward rate to repay your dollar borrowing. D) There are no profitable arbitrage opportunities.
8 5

17

Purchasing power parity (PPP) theory provides that Need a Hint? the cost of a haircut in Columbia, Missouri should be exactly the same as the cost of a haircut in Hong A) Kong. B) C) rates of inflation must be the same everywhere. spot exchange rates are the best predictor of expected inflation rates.

the cost of a Big Mac sandwich should be reflected in the cost of two all-beef patties, special sauce, D) lettuce, cheese, pickles, onions, and a sesame seed bun. E) None of the above.
9 4

Due to the integrated nature of their capital markets, investors in both the U.S. and the U.K. require the same real interest rate of 3%. Expected annual inflation is 2% in the U.S. and 5% in the U.K. The spot exchange rate is currently 1.00 = $1.80. Calculate the expected spot dollar-pound exchange rate expected to prevail in one year, assuming the Fisher effect holds. Need a Hint? A) B) C) D) 1.00 = $1.8000 1.03 = $1.8540 1.00 = $1.8540 1.00 = $1.7486
10 4

10

Due to the integrated nature of their capital markets, investors in both the U.S. and the U.K. require the same expected real interest rate of 3%. Expected annual inflation is 2 percent in the U.S. and 5% in the U.K. The spot exchange rate is currently 1.00 = $1.80. What is the forward dollar-pound exchange rate for one-year maturity? Need a Hint? A) B) C) D) 1.00 = $1.7500 1.00 = $1.7486 1.03 = $1.8540 1.00 = $1.8500

7 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Futures and Optio 7

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A call option Need a Hint? is a contract to buy a certain quantity of a specific underlying asset at a specific price at a specified A) date in the future. gives the holder the right, but not the obligation, to sell the underlying asset for a stated price over a B) stated time period. is an exchange-traded contract to buy a certain quantity of a specific underlying asset at a specific C) price at a specified date in the future. gives the holder the right, but not the obligation, to buy the underlying asset for a stated price over a D) stated time period.
2 4

Consider a put option written on 100,000. The strike price is $1.50 = 1.00 and the option premium is $0.02 per euro. What is the theoretical maximum gain on this position? Need a Hint? A) B) C) D) There is unlimited upside potential. $80,000 $148,000 $2,000
3 4

Consider a trader who opens a short futures position. The contract size is 62,500, the maturity is six months, and the initial price is $1.50 = 1. The next day, the settlement price is $1.60 = 1. What is the amount of the trader's gain or loss? Need a Hint? A) B) C) D) Gain of $6,250. Loss of $6,250. Gain of $2,604. No gain or loss, since maturity has not arrived.
4 4

Consider a trader who buys a European call option on euro. The contract size is 62,500, the maturity is six months, and the strike price is $1.50 = 1. At maturity, the settlement price is $1.60 = 1. What is the amount of the trader's gain or loss? Need a Hint? A) B) Gain of $6,250. Loss of $6,250. Gain of $2,604.

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C) No gain or loss, since expiry has not arrived.

5 4

D)

You have a call option on 10,000. Maturity is one year; the risk-free rate in dollars is 5% per annum. The euro is worth $1.50 today and in one year the euro will be worth either $1.60 or $1.40. The exercise price of the option is $1.50/. The one-year forward exchange rate is $1.55/. Use the binomial option pricing model to estimate the value of the call option described above. Need a Hint? A) B) C) D) $0 $714.29 $476.19 $13.64
6 4

You have a call option for which maturity is one year and the risk-free rate in dollars is 5% per annum. In one year the euro will be worth either $1.60 or $1.40. The exercise price of the option is $1.50/. The oneyear forward exchange rate is $1.55/. Calculate the hedge ratio for the call option described above. Need a Hint? A) B) C) D) 0.50 2.00 2.20 0.75
7 4

For two otherwise-identical put options, the more valuable one will have a Need a Hint? A) B) C) D) lower strike price. higher strike price. larger St. larger r$.
8 4

You have a six-month call option on Japanese yen. The strike price is $1 = 100. The volatility is 25 percent per annum; r$ = 5.5% and r = 6%. Use the European option pricing formula to find the value of the call option described above.

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Need a Hint?

A) B) C) D)

$0.005395/ $0.005982/ $0.006137/ None of the above.

9 4

Suppose you wish to speculate on a rise in the value of the euro. If you are correct and the value of the euro does indeed rise in the future, you would profit with Need a Hint? A) B) C) D) a short position in a futures contract on the euro. a long position in a futures contract on the euro. a short position in a forward contract on the euro. None of the above.
10 4

10

Consider a put option written on 100,000. The strike price is $1.50 = 1.00 and the option premium is $0.02. At what exchange rate will the buyer of this put option break even? Need a Hint? A) B) C) D) $1.00 = .667 $1.52 = 1.00 $1.48 = 1.00 $1.50 = 1.00

8 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Management of T

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Suppose that your firm is a U.S.based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of 100,000 to your German supplier. Today's spot exchange rate is 1.00 = $1.50 and the one year forward rate is 1.00 = $1.55. How can you fix the dollar cost of this order? Need a Hint? Enter into longposition in the oneyear euro futures contract at 1.00 = $1.55. This will fix the cost of

21

A) 100,000 at $155,000. Enter into shortposition in the oneyear euro futures contract at 1.00 = $1.55. This will fix the cost of B) 100,000 at $155,000. Since the spot price is more than the forward price, you should trade your dollars for euros today and C) pay your supplier early. D) Sell a call option on the euro with a oneyear maturity.
2 4

Suppose that your firm is a U.S.based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of 100,000 to your German supplier. Today's spot exchange rate is 1.00 = $1.50. The oneyear rate of interest is 4% in the U.S. and 6% in Germany. What trades in the spot foreign exchange market and in the money market will allow you to best fix the dollar cost of this order? Need a Hint? A) Exchange $150,000 for 100,000 at today's spot rate. In twelve months, pay your supplier.

Exchange $141,510 for 94,340 at the spot rate of 1.00 = $1.50. Invest the euros at i = 6%. In one year your investment will be worth 100,000, which is enough to pay your supplier. If you're short of B) cash today, borrow the $141,510 at i = 4 percent. $ Sell euros forward at the exchange rate expected to prevail in one year: C)

D)

None of the above.

3 4

Suppose that your firm is a U.S.based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of 100,000 to your German supplier. Today's spot exchange rate is 1.00 = $1.50 and oneyear call and put options are available on the euro with a variety of strike prices. How can you place an upper limit on the dollar cost of this order? Need a Hint? A) B) C) D) Buy oneyear put options on the euro. Sell oneyear put options on the euro. Sell oneyear call options on the euro. Buy oneyear call options on the euro.
4 4

Suppose a U.S. firm has just bought an asset from a Japanese firm for 500 million, due in one year. The spot exchange rate for Japanese yen is 122/$ and the one year forward exchange rate for Japanese yen is 130/$. The oneyear interest rate is 5% in the U.S. and 12% in Japan. Calculate today's cost (i.e. the present value) of meeting this obligation using a money market hedge. Need a Hint? A) $3,485,000

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B) C) D)

$3,659,250 $3,663,004 $3,842,213

5 4

Which of the following explains the process of a money market hedge for a foreign currency obligation? Need a Hint? Estimate the size of your contractual foreign currency obligation in dollars using the forward rate. Find the present value of that using the U.S. dollar interest rate. Buy the present value of the foreign A) currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate. Estimate the size of your foreign currency obligation. Buy enough call options to meet this obligation, B) and exercise the calls at maturity. Estimate the size of your contractual foreign currency obligation. Buy that much foreign currency at C) the spot rate and pay early. Estimate the size and timing of your contractual foreign currency obligation. Find the present value of the obligation using the foreign currency discount rate. Buy the present value of the foreign currency D) obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate.
6 4

Suppose a U.S. firm has sold an airplane to a British firm for 20 million, payable in one year. The spot exchange rate is $2.00 = 1.00 and the oneyear forward exchange rate is $2.01 = 1.00. The oneyear interest rate is 3% in the U.S. and 2.5% in Great Britain. Which of the following hedging strategies eliminates the exporter's exchange rate risk? Need a Hint? A) Sell 20 million forward at $2.01 = 1.00.

Since the forward rate is more than the spot rate, use a money market hedge instead of a forward B) market hedge. Borrow 19,512,195.12 from a British lender. Exchange for $39,024,390.24 at the spot exchange rate. C) In one year, the 20 million receivable will service the loan. D) Both A and C are correct.
7 4

A recurring exposure could best be hedged with Need a Hint? A) B) C) D) swaps. exposure netting. selling call options. buying call options.
8 4

23

Today, it is not unusual for an exporter to let the importer choose the currency of payment. Which of the following explains why this occurs? Need a Hint? A) B) C) D) This amounts to the exporter giving the importer a currency option. The importer is essentially selling an option to the exporter. This is an example of exposure netting. This only works when neither party wishes to hedge.
9 4

For an exporter selling in a foreign currency, if the domestic currency is strong or expected to become strong the firm could hedge by Need a Hint? A) B) C) D) selling their home currency forward. buying their foreign currency forward. buying their home currency forward. Both A and B are correct.
10 4

10

A firm that has exposure to a minor currency Need a Hint? A) B) C) D) can hedge to the exposure to an extent using crosshedging techniques. can directly hedge at no more expense than with a major currency. should never hedge because the cost would be too high. Both A and B are correct.

10 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Management of T

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Translation exposure measures Need a Hint? A) the extent to which the value of the firm will be affected by anticipated changes in exchange rates. the extent to which the value of the firm will be affected by unexpected changes in exchange rates.

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B) the effect that changes in exchange rates will have on the consolidated financial reports of a MNC.

C)

the effect that unanticipated changes in exchange rates will have on the value of contractual D) obligations denominated in a foreign currency.
2 4

Under the _________ method of consolidating the financial reports of a MNC, the gain or loss due to translation adjustment does not affect the reported cash flows. Need a Hint? A) B) C) D) current/noncurrent current rate monetary/nonmonetary temporal
3 4

In many cases it is not possible to completely eliminate all types of exposure. If a conflict such as this arises, which exposure should be viewed as the most important to effectively manage? Need a Hint? A) B) C) D) Translation exposure. Transaction exposure. Economic exposure. None of the above.
4 4

Under the _________ method monetary accounts such as cash, receivables, and payables (both current and noncurrent) are translated at the current exchange rate; other balance sheet accounts are translated at the current rate if they are carried on the books at current value and translated at historical rates if they are carried at historical costs. Need a Hint? A) B) C) D) current/noncurrent current rate monetary/nonmonetary temporal
5 4

25

Under the _________ method all monetary accounts such as cash, receivables, and payables (both current and noncurrent) are translated at the current exchange rate and all other balance sheet accounts are translated at the historical exchange rate. Need a Hint? A) B) C) D) current/noncurrent current rate monetary/nonmonetary temporal method
6 4

Under which method are all balance sheet accounts (except stockholders equity) translated at the current exchange rate? Need a Hint? A) B) C) D) Current/noncurrent. Current rate. Monetary/nonmonetary. Temporal.
7 4

Under which method does a cumulative translation adjustment appear? Need a Hint? A) B) C) D) Current/noncurrent. Current rate. Monetary/nonmonetary. Temporal.
8 4

The two methods used to manage (hedge) translation exposure are the Need a Hint? A) B) C) balance sheet hedge and derivatives hedge. current rate hedge and derivatives hedge. derivatives hedge and temporal hedge.

26

D)

transactions hedge and balance sheet hedge.

9 4

Using derivatives to hedge translation exposure Need a Hint? A) amounts to speculating in foreign exchange rate changes.

is a responsible thing to do when concerned with the effect of unanticipated changes in exchange B) rates. C) D) works best if your firm is worse than the market at forecasting exchange rates. Both A and B are correct.
10 4

10

Under which method are assets and liabilities translated based upon their maturity? Need a Hint? A) B) C) D) Current/noncurrent. Current rate. Monetary/nonmonetary. Temporal.

11 Multiple Choice Quiz

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Multiple Choice Q 1

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International Bank 11

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A correspondent bank Need a Hint? A) B) C) D) is established when two banks maintain correspondent bank accounts with each other. likes to write letters to its customers is a small service facility staffed by parent bank personnel that is designed to assist MNC clients. is also known as a subsidiary.
2 4

A Eurodollar is Need a Hint? another name for the euro.

27

A) a time deposit of U.S. dollars held in Europe, but not elsewhere. a time deposit of U.S. dollars held in an international bank located outside the United States. a time deposit of euros.
3 4

B) C) D)

LIBOR stands for Need a Hint? A) B) C) D) Luxembourg Interbank Offered Rate. Lisbon International Bank Offered Rate. Long-term International Bank Offered Rate. London Interbank Offered Rate.
4 4

Eurocredits are Need a Hint? short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign A) governments, nonprime banks, or international organizations. B) C) D) government bonds, denominated in euros, issued by the European Central Bank. credit cards that are denominated in euros. equivalent to commercial paper issued in euros.
5 4

A "three against nine" forward rate agreement Need a Hint? A) could call for a buyer to sell a six-month Eurobond in three months at prices agreed upon today.

could call for a buyer to pay the seller the increased interest cost on a notational amount if six-month interest rates fall below an agreed rate beginning three months from now and ending nine months B) from now. C) D) is a forward contract on a three-month Eurobond with a nine-month maturity. is a forward contract on a nine-month Eurobond with a three-month maturity.
6 4

The international debt crisis was caused by Need a Hint?

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A) B) C) D)

interest rates that became too high, burdening debtor nations. international banks lending more to third world sovereign governments than they should have. sovereign governments raising taxes too quickly. Eurodollar defaults.
7 3

A bank buys a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5%. Assume that three months from today the settlement rate is 5.25%. Who pays who? How much? The actual number of days in the FRA is 90. Need a Hint? A) B) C) The bank pays $3,0084.52. The counterparty pays $3,0084.52. None of the above.
8 4

Forward rate agreements can be used for speculative purposes. If someone believes rates will be less than the agreement rate, they will think Need a Hint? A) B) C) D) they should take a short position in a forward rate agreement. The purchase of a FRA is the suitable position the sale of a FRA is the suitable position. they should take a long position in the spot market.
9 4

Your firm borrows 1,000,000 at LIBOR + 0.5% on a six-month rollover basis. If six-month LIBOR is 5% over the first six-month period and 6% over the second six-month period, how much in interest will your firm pay over the first year of the loan? Need a Hint? A) B) C) D) 5.5% or 55,000 12% or 120,000 6% or 60,000 11.5% or 115,000

29

10

10

During the period leading up to the credit crisis, subprime mortgages were Need a Hint? A) B) C) D) held by the mortgage originators. repackaged as CDOs. repackaged as mortgage-backed securities. repackaged as LBOs.

12 Multiple Choice Quiz

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Multiple Choice Q 1

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International Bond 12

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Which of the following is true regarding ownership of a bearer bond? Need a Hint? A) B) C) D) Possession is evidence of ownership. The owner's name is on the bond and registered with the issuer. The owner's name is registered with the issuer but not on the bond. The owner's name is assigned to the serial number on the bond.
2 4

Eurobonds are usually Need a Hint? A) B) C) D) registered bonds. bearer bonds. floating-rate, callablem and convertible. denominated in the currency of the country that they are sold in.
3 4

Other things equal, investors will generally ______________ on bearer bonds than on registered bonds of comparable terms. Need a Hint? A) demand a higher credit rating

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B) C) D)

demand a higher yield accept a lower yield demand a higher credit rating and higher yield
4 4

Six-month U.S. dollar LIBOR is currently 4.375%, and your firm issues floating-rate notes indexed to sixmonth U.S. dollar LIBOR plus 50 basis points. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value? Need a Hint? A) B) C) D) $43.75 $48.75 $24.375 $46.875
5 4

Consider a 10 percent euro/British pound dual currency bond that pays 2,000 at maturity per 1,000 of par value. What is the implicit / exchange rate at maturity? Need a Hint? A) B) C) D) 2.00 = 1.00 0.50 = 1.00 2.10 = 1.00 1.8182 = 1.00
6 4

Suppose your firm issues a 100,000,000 one-year bond with a coupon rate of 8 percent per annum. The underwriting spread is 2 percent. What is your actual cost of this debt? Need a Hint? A) B) C) D) 8% 10% 10.2% None of the above.
7 4

31

For years Standard & Poor's has provided credit ratings on international bonds. These ratings Need a Hint? A) B) reflect the safety of principal for a U.S. investor. reflect the creditworthiness of the borrower and not exchange rate uncertainty.

reflect the creditworthiness of the lender and predict the exchange rate expected to prevail at C) maturity. D) are biased, since 40 percent of Eurobond issues are rated AAA and 30 percent are AA.
8 4

The credit rating of an international borrower Need a Hint? A) B) depends on the volatility of the exchange rate. depends on the volatility, but not absolute level, of the exchange rate.

is usually never higher than the rating assigned to the sovereign government of the country in which it C) resides. D) is unrelated to the rating assigned to the sovereign government of the country in which it resides.
9 4

Which of the following is true regarding dual-currency bonds versus comparable straight fixed-rate bonds? Need a Hint? Dual currency bonds usually trade at a premium to reflect the value of the forward contract implicit in A) their repayment schedule. B) C) D) The interest on dual-currency bonds is usually lower than on comparable straight fixed-rate debt. The interest on dual-currency bonds is usually higher than on comparable straight fixed-rate debt. None of the above.
10 4

10

Dual currency bonds are most appropriate for a borrower who Need a Hint? A) B) wants to speculate in the exchange rate markets. has a long-term project that has large cash outflows at maturity.

has a long-term project that will be financed with the home currency but is expected to produce C) enough foreign currency profits to repay the principal at maturity. D) is a Japanese bank.

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13 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

International Equit

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A country's primary market is the market that has Need a Hint? A) B) C) D) the largest number of shares traded through it. the largest total value of shares traded through it. the largest number and value of shares traded through it. the sale of securities by corporations to initial investors.
2 4

In a call market Need a Hint? A) traders know ahead of time the price that their orders will be executed at.

an agent of the exchange accumulates, over a period of time, a batch of orders that are periodically B) executed. an agent of the exchange periodically calls out the name of the issue. At this point, traders announce C) their bid and ask prices for the issue, and seek counterparts to a trade. D) market and limit orders may be executed at any time during business hours.
3 4

Cross listing Need a Hint? refers to a firm having its equity shares listed on one or more foreign exchanges, in addition to the A) home country stock exchange. B) C) D) is not an option for non-MNCs. is only an option for MNCs. Both B and C are correct.
4 4

An American Depository Receipt (ADR) is a Need a Hint? A) mechanism for the avoidance of taxes, especially capital gains taxes, on shares of foreign stocks. bearer security, not a registered security.

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B) receipt representing a number of foreign shares that are deposited in a U.S. bank. None of the above.
5 4

C) D)

Changes in exchange rates generally Need a Hint? A) B) C) D) explain a larger portion of the variability of foreign bond indexes than foreign equity indexes. explain a larger portion of the variability of foreign equity indexes than foreign bond indexes. do not affect the variability of foreign equity indexes or foreign bond indexes. affect all foreign stock markets equally.
6 4

Market capitalization Need a Hint? A) B) C) D) is generally higher in developing countries. depends on the exchange rate. is generally higher in developed countries. None of the above.
7 4

On the Paris bourse shares of Avionelle trade at 45. The spot exchange rate is $1.00 = 0.800. What is the no-arbitrage U.S. dollar price of an ADR? Assume that transactions costs are negligible. Need a Hint? A) B) C) D) $56.25 $36.00 $45.00 $45.50
8 4

On the Paris bourse shares of Avionelle trade at 45, while in New York Avionelle trades as an ADR at $60. The spot exchange rate is $1.40 = 1.00. What can you do to earn a profit? Assume that transactions costs are negligible. Need a Hint?

34

A) B) C) D)

Buy the ADR, short sell the shares on Paris. Short sell the ADR, go long in Paris. Buy the ADR and the shares in Paris. Sell the euro.
9 4

Exchange markets in the United States are Need a Hint? A) B) C) D) call markets. crowd markets. agency/auction markets. OTC.
10 4

10

A specialist Need a Hint? A) B) C) D) is an investor who only holds shares issued by one company. is a dealer in the OTC market. makes a market by holding an inventory of a security. None of the above.

14 Chapter Quiz
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Chapter Quiz 1

no 4

Interest Rate and

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Consider a plain vanilla interest rate swap. Corporation ABC can borrow at 8% fixed or can borrow floating at LIBOR. Corporation XYZ is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%. ABC prefers to borrow floating and XYZ prefers to borrow fixed. Both corporations wish to borrow $10 million for 5 years. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Need a Hint? ABC borrows $10 million externally for 5 years at LIBOR and agrees to swap LIBOR to XYZ for 8.5% A) fixed for 5 years on a notational principal of $5 million. XYZ borrows $10 million externally at 10%. ABC borrows $10 million externally for 5 years at LIBOR and agrees to pay 8.5% to XYZ for LIBOR B) fixed for 5 years on a notational principal of $5 million. XYZ borrows $10 million externally at 10%.

35

C)

Since the QSD = 0 there is no mutually beneficial swap.

ABC borrows $10 million externally at 8% fixed for 5 years and agrees to swap LIBOR to XYZ for 8.5% fixed for 5 years on a notational principal of $5 million. XYZ borrows $10 million externally at LIBOR + D) 1%.
2 4

Consider this fixed for fixed currency swap. The Dow Corporation is a U.S.-based multinational. The Jones Corporation is a U.K.-based multinational. Dow wants to finance a 2 million expansion in Great Britain. Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Dow can borrow dollars at 10% and pounds sterling at 12%. Jones can borrow dollars at 9% and pounds sterling at 11%. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk. Need a Hint? A) There is no mutually beneficial swap that has neither party facing exchange rate risk.

Dow borrows $4 million in dollars and pays 11% in pounds to Jones, who in turn borrows 2 million in B) pounds and pays 8% in dollars to Dow. Dow borrows $2 million in dollars and pays 11% in pounds to Jones, who in turn borrows 4 million in C) pounds and pays 8% in dollars to Dow. Dow borrows $4 million in dollars and pays 11% in pounds to Jones, who in turn borrows 2 million in D) pounds and pays 10% in dollars to Dow.
3 4

Consider a bank that has entered into a five-year swap on a notational balance of $10,000,000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. As of the fourth reset date, what is the price of the swap from the bank's point of view, assuming that the fixed-rate side of the swap has increased to 11 percent, LIBOR is at 5 percent, and the swap includes both interest and principal? Need a Hint? A) B) C) D) $909,090.91 gain. $90,090.09 loss. No loss or no gain since maturity has not arrived. $90,090.09 gain.
4 4

Consider a fixed for fixed currency swap. The Dow Corporation is a U.S.-based multinational. The Jones Corporation is a U.K.-based multinational. Dow wants to finance a 2 million expansion in Great Britain. Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Dow can borrow dollars at $10% and pounds sterling at 12%. Jones can borrow dollars at $9% and pounds sterling at 10%. Assuming that the swap bank is willing to take on exchange rate risk, but the other counterparties are not, which of the following swaps is mutually beneficial to each party and meets their financing needs? Need a Hint? Dow borrows $4 million in dollars externally at $10% and pays 11.75% in pounds to the swap bank on a notational principal of 2 million. Dow receive $10% from the swap bank on a notational principal A) of $4 million. Jones borrows 2 million pounds externally at 10% and pays $8.75% to the swap bank on a notational principal of $4 million. Jones receives 10% in pounds from the swap bank on a notational principal of 2 million.

36

Dow borrows $4 million in dollars externally at $10% and pays 11.5% in pounds to the swap bank on a notational principal of 2 million. Dow receive $10% from the swap bank on a notational principal of B) $4 million. Jones borrows 2 million pounds externally at 10% and pays $8.5% to the swap bank on a notational principal of $4 million. Jones receives 10% in pounds from the swap bank on a notational principal of 2 million. Dow borrows $4 million in dollars externally at $10% and pays 11% in pounds to the swap bank on a notational principal of 2 million. Dow receive $8% from the swap bank on a notational principal of $4 C) million. Jones borrows 2 million pounds externally at 10% and pays $10% to the swap bank on a notational principal of $4 million. Jones receives 11% in pounds from the swap bank on a notational principal of 2 million. D) There is no swap that is mutually beneficial to each party.
5 4

When a swap bank serves as a dealer, the swap bank Need a Hint? A) B) C) D) stands willing to accept either side of a swap. matches counterparties but does not assume any risk of the swap. receives a commission for matching buyers and sellers. None of the above.
6 4

When a swap bank serves as a broker, the swap bank Need a Hint? A) B) C) D) stands willing to accept either side of a swap. matches counterparties but does not assume any risk of the swap. receives a portion of the cash flows passed through it. None of the above.
7 4

What is the all-in cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + 0.5 percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent? Need a Hint? A) B) C) D) LIBOR + 0.5 percent. LIBOR. LIBOR 0.5 percent. None of the above.

37

With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to the risk that Need a Hint? arises from the situation in which the floating rates of the two counterparties are not pegged to the A) same index. interest rates will change unfavorably before the swap bank can lay off to an opposing counterparty on B) the other side of an interest rate swap entered into with the first counterparty. the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a C) swap it undertakes with one counterparty with an opposing transaction. D) a counterparty will default.
9 4

With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to the risk that Need a Hint? arises from the situation in which the floating rates of the two counterparties are not pegged to the A) same index. interest rates will change before the swap bank can lay off to an opposing counterparty on the other B) side of an interest rate swap entered into with the first counterparty. the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a C) swap it undertakes with one counterparty with an opposing transaction. D) it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take.
10 4

10

You are the debt manager for a U.S.-based multinational. You need to borrow 100,000,000 for five years. You can either borrow the 100,000,000 directly in Germany or borrow dollars in the U.S. and enter into a combined interest rate and currency swap with a swap bank. One risk that you face by using the swap that you do not face by borrowing euros directly is Need a Hint? A) B) C) D) exchange rate risk. an increase in sovereign risk. credit risk. interest rate risk

16 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

Foreign Direct Inv

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Political risk Need a Hint?

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A) B)

is an example of a macro risk. arises from uncertainty regarding exchange rates.

refers to the potential losses to the parent firm resulting from adverse political developments in the C) host country. D) Both A and C are correct.
2 4

Other things equal, a country will be perceived to have more political risk if Need a Hint? A) B) C) D) it is less integrated into the world system. its government is more stable than its neighbors. its neighboring countries' governments are more stable than its own. it is lessening income inequality.
3 4

Country risk is Need a Hint? A) B) C) D) a narrower measure of risk than political risk. a broader measure of risk than political risk. unrelated to political risk. None of the above.
4 4

OPIC stands for Need a Hint? A) B) C) D) The Organization of Petroleum Importing Countries. The Olympic Potential Incubation Center. The Option Pricing Institute Councils. The Overseas Private Investment Corporation.
5 4

In a country where the bribery of officials is a normal part of doing business,

39

Need a Hint?

A) B) C) D)

U.S. MNCs should adjust capital budgeting projects in that country by including the cost of the bribes. U.S. firms are legally able to bribe foreign officials, but are not able to deduct the costs. U.S. firms are legally prohibited from bribing foreign officials by the Foreign Corrupt Practices Act. None of the above.
6 4

When an MNC builds brand-new production facilities overseas, this is an example of Need a Hint? A) B) C) D) a cross-border M&A. a Greenfield investment. foreign direct investment. Both B and C are correct.
7 4

Imperfect factor markets drive much FDI. Which of the following markets has the mostimperfections? Need a Hint? A) B) C) D) Product market. Labor market. Capital market. Market for raw materials.
8 4

Other things equal, a firm with a greater investment in intangible assets is Need a Hint? A) B) C) D) more likely to establish foreign subsidiaries than to use licensing. less likely to consider foreign direct investment. less likely to establish foreign subsidiaries than licensing. less profitable.
9 4

40

When U.S. car makers began to build their own network of dealerships in Japan, this was an example of Need a Hint? A) B) C) D) forward vertical FDI. backward vertical FDI. horizontal FDI. Both A and C are correct.
10 4

10

How would you incorporate the cost of an insurance premium for political risk into the capital budgeting process? Need a Hint? A) B) C) D) Subtract the insurance premium from the expected cash flows for the project when computing its NPV. Raise the cost of capital (discount rate). Adjust the NPV downward by a subjective amount. None of the above.

17 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

International Capi

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Regarding the financial structure of foreign subsidiaries, it may be advantageous to Need a Hint? A) B) conform to the parent firm's debt-to-equity ratio conform to the local norm of the country where the subsidiary operates.

vary judiciously to capitalize on opportunities to lower taxes, reduce financing costs and risk, and take C) advantage of various market imperfections. D) All of the above.
2 4

When a parent company is willing to let its subsidiary default, Need a Hint? creditors and potential creditors will examine the subsidiary's financial structure closely to assess A) default risk. potential creditors will still look to the parent company's capital structure as it is legally and morally B) responsible for its subsidiary's debts.

41

it is incumbent upon the subsidiary to take on as much debt as possible, pay a big dividend to the C) parent, and finally default. D) None of the above.
3 4

The cost of capital is Need a Hint? A) B) C) D) defined as K = (1 l)Kl + l(1 t)i. the minimum rate of return an investment project must generate in order to pay its financing costs. an accounting number reflecting historical costs. None of the above.
4 4

Which of the following describes a benefit companies can experience from cross-border listing of stocks? Need a Hint? The company can expand its potential investor base, which will lead to a higher stock price and a lower A) cost of capital. B) C) D) The liquidity of the company's stock can be enhanced. The company's corporate governance and transparency can be improved. All of the above.
5 4

A firm that can reduce its cost of capital Need a Hint? A) has an arbitrage opportunity.

can identify more projects that generate returns exceeding the cost of capital, thereby increasing the B) firm's value. C) D) will lower its overall risk. None of the above.
6 4

If international financial markets are fully integrated rather than segmented investors will require, on average, expected returns on securities. Need a Hint? A) lower

42

B) C) D)

higher the same None of the above.

7 4

If international financial markets are less than fully integrated, then Need a Hint? A) B) any differences in the cost of capital across countries can be diversified away. systematic differences in the cost of capital may exist across different countries.

any difference in the cost of capital that may exist across different countries is due to differences in C) unsystematic risk. D) None of the above.
8 4

A consideration of political risk Need a Hint? A) B) C) D) generally favors local financing over the parent's direct financing. generally favors external debt over equity financing. Both A and B. None of the above.
9 4

When Nestl announced that it would lift restrictions on foreign ownership of its registered shares, Need a Hint? A) B) C) D) the price of registered shares rose. the price of registered shares fell. the two classes of shares began a pricing to market phenomenon after the announcement. Both A and C.
10 4

10

When Nestl announced that it would lift restrictions on foreign ownership of its registered shares, Need a Hint? the price of registered shares rose but the price of bearer shares fell. As a result, the total market value of the company remained unchanged.

43

A) the total market value of the company increased. Nestl's cost of capital increased. None of the above.

B) C) D)

21 Multiple Choice Quiz

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Multiple Choice Q 1

no 4

International Tax

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The underlying principal of tax equity Need a Hint? is that similarly situated taxpayers should participate in the cost of operating the government according A) to the same rules. B) C) D) has been adopted worldwide under U.N. charter. is that taxes, to be fair, should be a consistent percentage of income regardless of where it is earned. All of the above.
2 4

Affiliate A sells 1,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer price can be set at any level between $100 and $200. Which transfer price between A and B should the parent select? Need a Hint? A) B) C) D) $200 $100 $150 It doesn't matter.
3 4

Tax neutrality is determined by which of the following criteria? Need a Hint? A) B) C) National neutrality. Capital import neutrality. Capital export neutrality.

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D)

All of the above.

4 4

A value added tax is Need a Hint? preferred in place of a personal income tax by many economists, because income taxes are a A) disincentive to work, whereas a VAT discourages unnecessary consumption. B) also known as an ad valorem tax.

an indirect national tax levied on the value added in the production of a good (or service) as it moves C) through the various stages of production. D) All of the above.
5 4

When the income tax rate in the host country is greater than the tax rate in the parent country, Need a Hint? it is beneficial to follow a high markup policy on transferred goods and services from the parent to a A) foreign affiliate. it is beneficial to follow a low markup policy on transferred goods and services from the parent to a B) foreign affiliate. C) D) transfer pricing will not affect the total tax liability, net of foreign tax credit offsets. None of the above.
6 4

A tax haven is Need a Hint? A) B) C) D) a country that has a low corporate income tax rate and low withholding tax rates on passive income. a country with no taxes and no enforcement of foreign tax laws within its borders. any country with a higher tax rate than available domestically. None of the above.
7 4

There are three stages of production required before a bicycle produced by Masi Bicicletia can be sold at retail for 3,500. The VAT rate is 15%. See the table below for the selling price at each production stage.

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What is the total tax liability due? Need a Hint? 525 150 3,500 None of the above
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A) B) C) D)

If U.S. taxing authorities didn't limit the amount of the foreign tax credit to the equivalent amount of the U.S. tax, Need a Hint? A) B) C) D) U.S. taxpayers would end up subsidizing part of a U.S. MNC's tax liabilities on foreign earned income. national neutrality would suffer. U.S. MNCs would depart U.S. shores. All of the above.
9 4

Which of the following statements is true regarding active income? Need a Hint? A) B) C) D) It is income that results from production by the firm or individual (of goods or services). It is income earned by professional athletes. It includes dividend and interest income, since the tax court has ruled that taking risk is a form of work. None of the above.
10 4

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The current U.S. marginal tax rate for domestic nonfinancial corporations is 35%. This tax rate is Need a Hint? positioned fairly in the middle of the rates assessed by the majority of countries, as reported in the A) PriceWaterhouseCoopers annual Corporate Taxes: Worldwide Summaries. B) positioned toward the upper end of the rates assessed by the majority of countries.

is reduced on a dollarfordollar basis for any and all taxes paid to foreign governments, so this is an C) upper limit for the tax rate faced by U.S. MNCs. D) All of the above.

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