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1. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to _______ and when foreign currencies denominating these cash flows are expected to _______, other things being equal. A) decrease; appreciate B) increase; appreciate C) decrease; depreciate D) increase; depreciate E) Not enough information ANSWER: B

2. 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) both B and C. E) none of these. ANSWER: C

3. An increase in the use of quotas is expected to: A) reduce the countrys current account balance, if other governments do not retaliate. B) increase the countrys current account balance, if other governments do not retaliate. C) have no impact on the countrys current account balance unless other governments retaliate. D) increase the volume of a countrys trade with other countries. E) decrease inflation. ANSWER: B

4. Dumping is used in the text to represent the: A) exporting of goods that do not meet quality standards. B) sales of junk bonds to foreign countries. C) removal of foreign subsidiaries by the host government. D) exporting of goods at prices below cost. E) exporting of goods at large quantity. ANSWER: D

5. Assume that a banks 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%. E) about 4.31%. ANSWER: B

SOLUTION: Bid-ask percentage spread = ($.47 $.45)/$.47 = 4.26% 6. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: A) obtain a 90-day forward purchase contract on Canadian dollars. B) obtain a 90-day forward sale 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. E) purchase Canadian dollars now at the sport rate and wait for 90 days to pay. ANSWER: A

7. 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

8. Assume a Japanese firm invoices exports to the U.S. 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 to avoid the loss. It could hedge by _______U.S. dollars forward. A) depreciate; buying B) depreciate; selling C) appreciate; selling D) appreciate; buying E) No enough information ANSWER: B

9. Eurobonds: A) can be issued only by European firms. B) can be sold only to European investors. C) can be issued only by European firms AND can be sold only to European investors. D) are mostly dominated by U.S. dollar. E) none of these is right. ANSWER: D

10. An increase in U.S. interest rates relative to German interest rates would likely immediately_______ the U.S. demand for euros and _______ the supply of euros for sale. A) reduce; increase B) increase; reduce C) reduce; reduce D) increase; increase E) no enough information ANSWER: A

11. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should _______, the outflow of its funds to purchase U.S. securities should _______, and there is _______ pressure on its currencys equilibrium value in the long run. A) increase; decrease; downward B) decrease; increase; upward C) increase; decrease; upward D) decrease; increase; downward E) increase; increase; upward ANSWER: C

12. A weak dollar is normally expected to cause: A) high unemployment and high inflation in the U.S. B) high unemployment and low inflation in the U.S. C) low unemployment and low inflation in the U.S. D) low unemployment and high inflation in the U.S. E) more trade deficit ANSWER: D

13. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: A) larger will be the forward discount of the foreign currency. B) larger will be the forward premium of the foreign currency.

C) smaller will be the forward premium of the home currency. D) larger will be the forward discount of the home currency. E) both A and C. ANSWER: A

14. Assume that interest rate parity holds, and the euros interest rate is 9% while the U.S. interest rate is 12%. Then the euros interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euros forward _______ will _______ in order to maintain interest rate parity. A) discount; increase B) discount; decrease C) premium; increase D) premium; decrease E) uncertain ANSWER: D

15. Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in the U.S. is 3.00%. According to PPP, the Barbados dollar (BBD) should _______ by _______%. A) appreciate; 0.1938% B) depreciate; 0.1938% C) appreciate; 0.1942% D) depreciate; 0.1942% E) appreciate; 0.2000% ANSWER: B

SOLUTION: (1.03/1.032) 1 = .1938%. 16. If a U.S.-based MNC focused completely 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: A

17. If a countrys government imposes a tariff on imported goods, that countrys current account balance will likely _______ (assuming no retaliation by other governments). A) decrease B) increase ANSWER: B

18. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time. A) true. B) false. ANSWER: B

19. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account. A) true. B) false. ANSWER: B

20. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. How will this affect the value of the British pound? Why? Please explain within 2-3 sentences. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. Will this change in interest rates affect the value of the British pound? Why? Please explain within 2-3 sentences. (2 points) Pound will decrease. According to PPP, UK consumer will purchase more goods from US that are cheaper. Higher demand leads to higher imports, which in turn lead to higher demand for US dollars and larger supply of Pound. According to IRP, Pound will increase in short term but decrease in forward. Higher interest rate in UK leads to higher demand in pound, push up pound value in short term. In long run, US investors have to exchange back from pound to US dollar after the investment period, and push up demand in US dollar and therefore its value. 21. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: (1 point) SOLUTION: $.35/$.88 = C$.3977/S

2 A US dollar is worth 125 Japanese yen, and a Fijian dollar (F$) is worth $.5900. What is 2
the value of the yen in Fijian dollars? (1 point) SOLUTION: 1/(125/$)=$0.008/; $.008/$.59 = F$.0136/ Or (125/$) x ($.59/F$)=73.75/F$, 1/73.75= F$.0136/

2 You just received a gift from a friend consisting of 1,000 Thai baht, which you would like 3
to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht? (1 point)

SOLUTION: $.023/$.576 THB1,000 = A$39.9300.

2 The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The current 4
exchange rate for the Japanese yen () is $0.0075. After supply and demand for the Japanese yen has adjusted by purchasing power parity, what is the new exchange rate for the yen? (1 point) SOLUTION: (1.03/1.013) $.0075 = $.0076/

2 You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you 5
expect the Australian dollar (A$) to appreciate by 2%. What would be your effective return from this investment? What if the Australian dollar depreciates by 10% instead? (2 points) SOLUTION: (1.08 1.02) 1 = 10.16%; (1.08 0.9) 1 = -0.028% 26. Assume the following information: You have $1,000,000 to invest. 12-month deposit rate in U.S. = 12% 12-month deposit rate in U.K. = 16% The Bank of America offers: Current spot rate of pound (Bid/Ask) = $1.6000/1.6050 12month forward rate (Bid/Ask) = $1.5700/1.5750

1 Based on IRP, what should be the theoretical 12-month forward rate of pound? )
Compute both bid and ask. (1 point)

2 If you will invest in U.K and use the spot rate and forward contract as quoted by )
Bank of America, what will be the amount of U.S. dollars you have after 12 months? (1 point) 3 If you will invest in U.K and use Bank of Americas spot rate but the theoretical ) forward rate based on IRP, what will be the amount of U.S. dollars you have after 12 months? (1 point) Solution: 1) F(bid)=(1+0.12)/(1+0.16)x1.6000=$1.5448 F(ask)=(1+0.12)/(1+0.16)x1.6050=$1.5497 2 ) 3 )

1,000,000 (1 + 0.16) 1.57 = $1,134,704.05 1.6050 1,000,000 (1 + 0.16) 1.5448 = $1,116,490.97 1.6050