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FIN 534 Quiz 10 CHAPTER 17
MULTINATIONAL FINANCIAL MANAGEMENT
Please see the preface for information
on the AACSB letter indicators (F, M, etc.) on the subject lines.
True/False
Easy:
(17.3)
Multinational financial management FT Answer: EASY
. Multinational financial management requires that financial
analysts consider the effects of changing currency values.
a. True
b. False
(17.3)
Multinational financial management FT Answer: EASY
. Legal and economic differences among countries, although
important, do NOT pose significant problems for
most multinational corporations when they coordinate and control worldwide
operations of subsidiaries.
a. True
b. False
(17.3)
Exchange rates FT Answer: EASY
. Exchange rate quotations consist solely of direct quotations.
a. True
b. False
(17.3) Cross
rates FT Answer: EASY
. Calculating a currency cross rate involves determining the
exchange rate for two currencies by using a third currency as a base.
a. True
b. False
(17.3)
Currency appreciation FT Answer: EASY
. When the value of the U.S. dollar appreciates against another
country's currency, we may purchase more of the foreign currency with a dollar.
a. True
b. False
(17.4) Trade
deficit and depreciation FT Answer: EASY
. If the United States is running a deficit trade balance with
China, then in a free market we would expect the value of the Chinese yuan to
depreciate against the U.S. dollar.
a. True
b. False
(17.5)
Floating exchange rates FT Answer: EASY
. The United States and most other major industrialized nations
currently operate under a system of floating exchange rates.
a. True
b. False
(17.5)
Exchange rate risk FT Answer: EASY
. Exchange rate risk is the risk that the cash flows from a
foreign project, when converted to the parent company’s currency, will be worth
less than was originally projected because of exchange rate changes.
a. True
b. False
(17.10)
Eurodollars FT Answer: EASY
. A Eurodollar is a U.S. dollar deposited in a bank outside the
United States.
a. True
b. False
(17.10)
Eurodollar market FT Answer: EASY
. The Eurodollar market is essentially a long-term market; most
loans and deposits in this market have maturities longer than one year.
a. True
b. False
(17.10)
LIBOR FT Answer: EASY
. LIBOR is an acronym for London Interbank Offer Rate, which is an
average of interest rates offered by London banks to smaller U.S. corporations.
a. True
b. False
(17.11)
Political risk FT Answer: EASY
. Because political risk is seldom negotiable, it cannot be
explicitly addressed in multinational corporate financial analysis.
a. True
b. False
(17.13)
International credit management FT Answer: EASY
. Credit policy for multinational firms is generally more risky
due in part to the additional consideration of exchange rates and also due to
uncertainty regarding the credit worthiness of many foreign customers.
a. True
b. False
(17.13)
International working capital management
FT Answer: EASY
. Due to advanced communications technology and the
standardization of general procedures, working capital management for
multinational firms is no more complex than it is for large domestic firms.
a. True
b. False
(17.13)
Multinational inventory management
FT Answer: EASY
. Exchange rates influence a multinational firm's inventory policy
because changing currency values can affect the value of inventory.
a. True
b. False
(17.13)
Expropriation and inventory
FT Answer: EAST
. The threat of expropriation creates an incentive for the
multinational firm to minimize inventory holdings in certain countries and to bring
in goods only as needed.
a. True
b. False
Medium:
(17.5)
Forward market hedging transactions
FT Answer: MEDIUM
. Individuals and corporations can buy or sell forward currencies
to hedge their exchange rate exposure.
Essentially, the process involves simultaneously selling the currency
expected to appreciate in value and buying the currency expected to depreciate.
a. True
b. False
(17.6)
Discount on forward rate
FT Answer: MEDIUM
. If an investor can obtain more of a foreign currency for
a dollar in the forward market than in the spot market, then the forward
currency is said to be selling at a discount to the spot rate.
a. True
b. False
(17.6)
Premium on forward rate
FT Answer: MEDIUM
. If a dollar will buy fewer units of a foreign currency in
the forward market than in the spot market, then the forward currency is said
to be selling at a premium to the spot rate.
a. True
b. False
(17.9)
Currency value and inflation FT Answer:
MEDIUM
. A foreign currency will, on average, depreciate against the U.S.
dollar at a percentage rate approximately equal to the amount by which its
inflation rate exceeds that of the United States.
a. True
b. False
(17.10)
Eurodollar interest rates FT Answer: MEDIUM
. The interest rate paid on Eurodollar deposits depends on the
particular bank's lending rate and on rates available on U.S. money market
instruments.
a. True
b. False
(17.11)
Relevant investment cash flows FT Answer:
MEDIUM
. The cash flows relevant for a foreign investment should, from
the parent company's perspective, include the financial cash flows that the
subsidiary can legally send back to the parent company plus the cash flows that
must remain in the foreign country.
a. True
b. False
(17.11)
Foreign project's cost of capital FT Answer:
MEDIUM
. The cost of capital may be different for a foreign project than
for an equivalent domestic project because foreign projects may be more or less
risky.
a. True
b. False
(17.11) Risk
and international investment FT Answer:
MEDIUM
. When considering the risk of a foreign investment, a higher risk
might arise from exchange rate risk and political risk while lower risk might
result from international diversification.
a. True
b. False
Multiple Choice:
Conceptual
Easy:
(17.1)
Motivation for “going global” CT Answer: EASY
. Which of the following is NOT a
reason why companies move into international operations?
a. To take advantage of lower production costs in regions where labor
costs are relatively low.
b. To develop new markets for the firm’s products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. To increase their inventory levels.
(17.5)
Currency depreciation CT Answer: EASY
. If the inflation rate in the United States is greater
than the inflation rate in Britain, other things held constant, the British
pound will
a. Appreciate against the U.S. dollar.
b. Depreciate against the U.S. dollar.
c. Remain unchanged against the U.S. dollar.
d. Appreciate against other major currencies.
e. Appreciate against the dollar and other major currencies.
Medium:
(17.7)
Interest rate parity CT Answer: MEDIUM
. In Japan, 90-day securities have a 4% annualized return and
180-day securities have a 5% annualized return.
In the United States, 90-day securities have a 4% annualized return and
180-day securities have an annualized return of 4.5%. All securities are of equal risk, and
Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in
all markets, which of the following statements is most CORRECT?
a. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 90-day forward market.
b. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 180-day forward market.
c. The yen-dollar exchange rate in the 90-day forward market equals the
yen-dollar exchange rate in the 180-day forward market.
d. The spot rate equals the 90-day forward rate.
e. The spot rate equals the 180-day forward rate.
(17.10)
International bond markets CT Answer: MEDIUM
. Which of the following statements is NOT
CORRECT?
a. Any bond sold outside the country of the borrower is called an
international bond.
b. Foreign bonds and Eurobonds are two important types of international
bonds.
c. Foreign bonds are bonds sold by a foreign borrower but denominated
in the currency of the country in which the issue is sold.
d. The term Eurobond applies only to foreign bonds denominated in U.S.
currency.
e. A foreign bond might pay a higher nominal interest rate than a U.S.
bond.
Multiple Choice:
Problems
Easy:
(17.3)
Exchange rates CT Answer: EASY
. If one Swiss franc can purchase $0.71 U.S. dollars, how many
Swiss francs can one U.S. dollar buy?
a. 0.50
b. 0.71
c. 1.00
d. 1.41
e. 2.81
(17.3)
Exchange rates CT Answer: EASY
. If one U.S. dollar buys 1.64 Canadian dollars, how many U.S.
dollars can you purchase for one Canadian dollar?
a. 0.37
b. 0.61
c. 1.00
d. 1.64
e. 3.28
(17.4)
Currency appreciation CT Answer: EASY
. Suppose 144 yen could be purchased in the foreign exchange market
for one U.S. dollar today. If the yen
depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
a. 155.5 yen
b. 144.0 yen
c. 133.5 yen
d. 78.0 yen
e. 72.0 yen
(17.10)
Eurobonds versus domestic bonds CT Answer: EASY
. Suppose a foreign investor who holds tax-exempt Eurobonds paying
9% is considering investing in an equivalent-risk domestic bond in a country
with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required
return, what before-tax rate would the domestic bond need to pay to provide the
required after-tax return?
a. 9.00%
b. 10.20%
c. 11.28%
d. 12.50%
e. 13.57%
(17.13)
Credit and exchange rate risk CT Answer: EASY
. Suppose DeGraw Corporation, a U.S. exporter, sold a solar
heating station to a Japanese customer at a price of 143.5 million yen, when
the exchange rate was 140 yen per dollar.
In order to close the sale, DeGraw agreed to make the bill payable in
yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that
one dollar would buy 154.4 yen when the invoice was paid, what dollar amount
would DeGraw actually receive after it exchanged yen for U.S. dollars?
a. $1,075,958
b. $1,025,000
c. $1,000,000
d. $975,610
e. $929,404
Medium:
(17.3) Cross
rates CT Answer: MEDIUM
. Suppose the exchange rate between U.S. dollars and Swiss francs
is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro
is $1.00 = 1.64 euros. What is the
cross-rate of Swiss francs to euros?
a. 0.43
b. 0.86
c. 1.41
d. 1.64
e. 2.27
(17.3) Cross
rates—nonalgorithmic CT Answer: MEDIUM
. Suppose that currently, 1 British pound equals 1.62 U.S. dollars
and 1 U.S. dollar equals 1.62 Swiss francs.
What is the cross exchange rate between the pound and the franc?
a. 1 British pound equals 3.2400 Swiss francs
b. 1 British pound equals 2.6244 Swiss francs
c. 1 British pound equals 1.8588 Swiss francs
d. 1 British pound equals 1.0000 Swiss francs
e. 1 British pound equals 0.3810 Swiss francs
(17.3)
Forward exchange rates—nonalgorithmic
CT Answer: MEDIUM
. If the spot rate of the Israeli shekel is 5.51 shekels per dollar
and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate
for the Israeli shekel is selling at a ________________ to the spot
rate.
a. premium of 8%
b. premium of 18%
c. discount of 18%
d. discount of 8%
e. premium of 16%
(17.3)
Exchange rates and asset value CT Answer: MEDIUM
. In 1985, a given Japanese imported automobile sold for 1,476,000
yen, or $8,200. If the car still sold
for the same amount of yen today but the current exchange rate is 144 yen per
dollar, what would the car be selling for today in U.S. dollars?
a. $5.964
b. $8,200
c. $10,250
d. $12,628
e. $13,525
(17.5)
Currency depreciation CT Answer: MEDIUM
. Suppose one British pound can purchase 1.82 U.S. dollars today
in the foreign exchange market, and currency forecasters predict that the U.S.
dollar will depreciate by 12.0% against the pound over the next 30 days. How
many dollars will a pound buy in 30 days?
a. 1.12
b. 1.63
c. 1.82
d. 2.04
e. 3.64
(17.6)
Forward market hedge CT Answer: MEDIUM
. Stover Corporation, a U.S. based importer, makes a purchase of
crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or
$24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days,
and the U.S. firm wants to cover this trade payable with a forward market hedge
to eliminate its exchange rate risk.
Suppose the firm completes a forward hedge at the 90-day forward rate of
1.682 francs. If the spot rate in 90
days is actually 1.638 francs, how much will the U.S. firm have saved or lost
in U.S. dollars by hedging its exchange rate exposure?
a. -$396
b. -$243
c. $0
d. $243
e. $638
(17.7)
Interest rate parity CT Answer: MEDIUM
. Suppose 90-day investments in Britain have a 6% annualized
return and a 1.5% quarterly (90-day) return.
In the U.S., 90-day investments of similar risk have a 4% annualized
return and a 1% quarterly (90-day) return.
In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the
spot exchange rate?
a. 1 pound = $1.8000
b. 1 pound = $1.6582
c. 1 pound = $1.0000
d. 1 pound = $0.8500
e. 1 pound = $0.6031
(17.7)
Interest rate parity CT Answer: MEDIUM
. Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian
dollars. 6-month Canadian securities
have an annualized return of 6% (and thus a 6-month periodic return of
3%). 6-month U.S. securities have an
annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the
U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
a. 1 U.S. dollar = 0.6235 Canadian dollars
b. 1 U.S. dollar = 0.6265 Canadian dollars
c. 1 U.S. dollar = 1.0000 Canadian dollars
d. 1 U.S. dollar = 1.5961 Canadian dollars
e. 1 U.S. dollar = 1.6039 Canadian dollars
(17.8)
Purchasing power parity CT Answer: MEDIUM
. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss
francs. If purchasing power parity (PPP)
holds, what is the price of the product in Switzerland?
a. 123.75 Swiss francs
b. 454.55 Swiss francs
c. 750.00 Swiss francs
d. 1,237.50 Swiss francs
e. 1,650.00 Swiss francs
(17.8)
Purchasing power parity CT Answer: MEDIUM
. Suppose hockey skates sell in Canada for 105 Canadian dollars,
and 1 Canadian dollar equals 0.71 U.S. dollars.
If purchasing power parity (PPP) holds, what is the price of hockey
skates in the United States?
a. $14.79
b. $63.00
c. $74.55
d. $85.88
e. $147.88
(17.8) Purchasing
power parity—nonalgorithmic CT Answer:
MEDIUM
. A box of candy costs 28.80 Swiss francs in Switzerland and $20
in the United States. Assuming that
purchasing power parity (PPP) holds, what is the current exchange rate?
a. 1 U.S. dollar equals 0.69 Swiss francs
b. 1 U.S. dollar equals 0.85 Swiss francs
c. 1 U.S. dollar equals 1.21 Swiss francs
d. 1 U.S. dollar equals 1.29 Swiss francs
e. 1 U.S. dollar equals 1.44 Swiss francs
(17.9)
Exchange fluctuations and T-bills
CT Answer: MEDIUM
. Suppose 6 months ago a Swiss investor bought a 6-month U.S.
Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420
Swiss francs per dollar. Today, at
maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the
Swiss investor?
a. -7.92%
b. -4.13%
c. 6.00%
d. 8.25%
e. 12.00%
(17.13)
Inventory value and exchange rates
CT Answer: MEDIUM
. Suppose one year ago, Hein Company had inventory in Britain
valued at 240,000 pounds. The exchange
rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S.
dollars. The inventory in Britain is
still valued at 240,000 pounds. What is
the gain or loss in inventory value in U.S. dollars as a result of the change
in exchange rates?
a. -$240,000
b. -$43,200
c. $0
d. $43,200
e. $47,473
Hard:
(17.10) EAR
on foreign debt CT Answer: HARD
. Blenman Corporation, based in the United States, arranged a
2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos,
carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was
5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first
payment came due. The loan was not
hedged in the foreign exchange market.
Thus, Blenman must convert U.S. funds to Mexican pesos to make its
payments. If the exchange rate remains
at 5.10 pesos per dollar through the end of the loan period, what effective
interest rate will Blenman end up paying on the loan?
a. 10.36%
b. 11.50%
c. 17.44%
d. 20.00%
e. 21.79%
(17.11)
Foreign investment cash flows CT Answer: HARD
. Chen Transport, a U.S. based company, is considering expanding
its operations into a foreign country.
The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4
million per year for 2 years, $6 million for the next 2 years, and then a
possible terminal value of $8 million.
In addition, due to political risk factors, Chen believes that there is
a 50% chance that the gross terminal value will be only $2 million and a 50% chance
that it will be $8 million. However, the
government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are
80% of those projected. Chen's cost of
capital is 15%, but it adds one percentage point to all foreign projects to
account for exchange rate risk. Under
these conditions, what is the project’s NPV?
a. $1.01 million
b. $2.77 million
c. $3.09 million
d. $5.96 million
e. $7.39 million
(17.13)
Forward market hedge CT Answer: HARD
. Suppose a U.S. firm buys $200,000 worth of television tubes from
a Mexican manufacturer for delivery in 60 days with payment to be made in 90
days (30 days after the goods are received).
The rising U.S. deficit has caused the dollar to depreciate against the
peso recently. The current exchange rate
is 5.50 pesos per U.S. dollar. The
90-day forward rate is 5.45 pesos/dollar.
The firm goes into the forward market today and buys enough Mexican
pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30
Mexican pesos per U.S. dollar. How much
in U.S. dollars did the firm save by eliminating its foreign exchange currency
risk with its forward market hedge?
a. $0
b. $1,834.86
c. $4,517.26
d. $5,712.31
e. $7,547.17
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