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1. In some countries, bribes are commonplace. If a U.S.-based MNC decides to adhere to a strict code of ethics and not pay bribes, its subsidiary may be at a competitive disadvantage in the foreign country. A) true. B) false. 2. Which of the following theories identifies specialization as a reason for international business? A) theory of comparative advantage. B) imperfect markets theory. C) product cycle theory. D) none of the above 3. According to the text, products and services are generally becoming _______ standardized across countries, which tends to _______ the globalization of business. A) more; encourage B) more; discourage C) less; discourage D) less; encourage 4. Which of the following is an example of direct foreign investment? A) exporting to a country. B) establishing licensing arrangements in a country. C) purchasing existing companies in a country. D) investing directly (without brokers) in foreign stocks.

5. A high home inflation rate relative to other countries would _______ the home countrys current account balance, other things equal. A high growth in the home income level relative to other countries would _______ the home countrys current account balance, other things equal. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 6. Over time, international trade (exports plus imports) as a percentage of GDP has: A) increased for most major countries. B) decreased for most major countries. C) stayed about constant for most major countries. D) increased for about half the major countries and decreased for the others. 7. A weak home currency may not be a perfect solution to correct a balance of trade deficit because: A) it reduces the prices of imports paid by local companies. B) it increases the prices of exports by local companies. C) it prevents international trade transactions from being prearranged. D) foreign companies may reduce the prices of their products to stay competitive. 8. A balance-of-trade surplus indicates an excess of merchandise imports over merchandise exports. A) true. B) false. 9. 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%. 10. According to the text, the forward rate is commonly used for: A) hedging. B) Eurocurrency transactions. C) Eurocredit transactions. D) Eurobond transactions. 11. 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. 12. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction. A) true. B) false. . .13. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ______ in Mexican demand for U.S. goods, and the Mexican peso should _______. A) increase; appreciate B) increase; depreciate C) decrease; depreciate D) decrease; appreciate

14. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause: A) the Swiss demand for dollars to decrease and the dollar will depreciate against the pound. B) the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc. C) the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc. D) the Swiss demand for dollars to decrease and the dollar will appreciate against the pound. 15. The phrase the dollar was mixed in trading means that: A) the dollar was strong in some periods and weak in other periods over the last month. B) the volume of trading was very high in some periods and low in other periods. C) the dollar was involved in some currency transactions, but not others. D) the dollar strengthened against some currencies and weakened against others. 16. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. A) true. B) false. 17. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of 200,000 in three months. On June1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell 200,000 forward in three months.The spot rate of t he euro on September 1 is $1.15. Graylon will receive $_________ for the euros. A) 224,000 B) 220,000 C) 200,000 D) 230,000 18. When you own _______, there is no obligation on your part; however, when you own _______, there is an obligation on your part. A) call options; put options B) futures contracts; call options C) forward contracts; futures contracts D) put options; forward contracts 19, If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted. A) true. B) false. 20. 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. 21. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by _______ the dollar. Such an adjustment in the dollars value should _______ the U.S. demand for products produced by major foreign countries. A) weakening; increase B) weakening; decrease C) strengthening; increase D) strengthening; decrease 22. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.

A) true. B) false. 23. Due to _______, market forces should realign the spot rate of a currency among banks. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage 24. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute loca-tional arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? A) $10,003. B) $12,063. C) $14,441. D) $16,393. E) $18,219. 25. For locational arbitrage to be possible, one banks ask rate must be higher than another banks bid rate for a currency. A) true. B) false. 26. Translation exposure reflects: A) the exposure of a firms ongoing international transactions to exchange rate fluctuations. B) the exposure of a firms local currency value to trans actions between foreign exchange traders. C) the exposure of a firms financial statements to exchange rate fluctuations. D) the exposure of a firms cash flows to exchange rate fluctuations. 27. Economic exposure refers to: A) the exposure of a firms ongoing international transactions to exchange rate fluctuations. B) the exposure of a firms local currency value to transactions between foreign exchange traders. C) the exposure of a firms financial statements to exchange rate fluctuations. D) the exposure of a firms cash flows to exchange rate fluctuations. E) the exposure of a countrys economy (specifically GNP) to exchange rate fluctuations. 28. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually. A) true. B) false. 29. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be: A) a money market hedge. B) purchasing euro put options. C) a forward purchase of euros. D) purchasing euro call options. E) selling euro call options. 30. An example of cross hedging is: A) find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency. B) use the forward market to sell forward whatever currencies you will receive.

C) use the forward market to buy forward whatever currencies you will receive. D) B and C 31. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible. A) true. B) false. 32. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firms reported earnings (from the consolidated income statement) to _______. If a firm desired to protect against this possibility, it could stabilize its reported earnings by _______ euros forward in the foreign exchange market. A) be reduced; purchasing B) be reduced; selling C) increase; selling D) increase; purchasing 33. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement. A) negative B) adversely affected C) favorably affected D) unaffected 34. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure. A) true. B) false. 35. When a firm analyzes the feasibility of a project, it should consider the: A) variability of the projects cash flow. B) correlation of the projects cash flow relative to the prevailing cash flows of the MNC. C) A and B D) none of the above 36. The __________ a projects variability in cash flows, and the __________ the positive correlation between the projects cash flow and MNCs cash flow, the lower the risk of the project. A) higher; higher B) higher; lower C) lower; lower D) lower; higher 37. ____________ is not a disadvantage of direct foreign investment. A) The expense of establishing a foreign subsidiary B) The uncertainty of inflation and exchange rate movements C) Political risk D) All of the above are disadvantages of direct foreign investment 38. They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time. A) true. B) false. 39. To best reduce exposure to a host government takeover, a subsidiary could: A) use a long run profit perspective for business in that country. B) hire people from its own country if the host government does not cooperate. C) attempt to obtain supplies from its parent. D) borrow funds from its parent rather than from the host countrys creditors.

40. When determining whether a particular proposed project in a foreign country is feasible: A) a country risk rating can adequately substitute for a capital budgeting analysis. B) country risk analysis should be incorporated within the capital budgeting analysis. C) the effect of country risk on sales revenue is more important than the effect on cash flows. D) the project with the highest country risk rating (lowest country risk) should be accepted. E) B and D 41. According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to: A) compare each form of a country risk rating to a benchmark level. B) estimate the effect of each form of country risk on cash flows. C) estimate the effect of each form of country risk on the income statement and balance sheet. D) adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs. 42. Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change. A) value B) current assets C) long-term liabilities D) competitive advantages 43. During periods of exchange rate volatility, firms dealing in _______ products face more exchange rate risk than the firms selling _________ products. A) low demand, high demand B) low supply, high supply C) undifferentiated, differentiated D) differentiated, undifferentiated 44. The most preferred form of securities for funding by firms in the U.S. is A) debt B) preferred stock C) common stock D) stock derivatives 45. ______ is replacing bank loans with securities issued in public markets. A) A drawdown B) Securitization C) Capital productivity D) Regulatory arbitrage 46. Which one of the following factors does NOT promote well-functioning financial markets? A) secure property rights B) high tariffs C) contracts that are easily enforced D) transparency in financial statements 47. Which one of the following new issues of stock has the greatest probability of lowering its cost of equity capital? A) Microsoft in the New York markets B) Toyota on the Tokyo exchange C) Apple stock on the London exchange D) all of the above 48. The dominant currency of the Eurocurrency markets is the A) U.S. dollar B) Euro

C) Yen D) Pound 49. One reason Eurocurrency deposit rates are higher than domestic rates is due to the fact that A) they have no relationship to domestic rates B) they must be higher to attract domestic depositors C) most borrowers are well-known D) a smaller percentage of deposits can be lent out 50. Suppose the French government imposes an interest rate ceiling on French bank deposits. What is the likely effect of this regulation? A) reduce Eurofranc interest rates B) raise Eurofranc interest rates C) have no effect D) cant tell 51. Suppose that the current 90 day London interbank offer rate is 11% (all rates are stated on an annualized basis. If next periods LIBOR is 10.5%, then a Eurodollar rate priced at LIBOR plus 1% will cost A) 12% this period and 11.5% next period B) 11% this period and 10.5% next period C) 12% this period and 12% next period D.) 11% this period and 11% next period 52. One function of the cost of capital is to ________ for the firm. A) determine the debt to equity ratio B) value future cash flows C) determine the current ratio D) determine the current lending rate 53. When computing the weighted average cost of capital, the weighting should be proportional based on the ______ rather than the _____ value of the firm. A) book, market B) hypothetical, book C) market, analysts D) market, book 54. Suppose that a foreign project has a beta of 1.12, the risk free return is 9.3% and the required return on the market is estimated at 18%. Then the cost of capital for the project is A) 17.21% B) 21.37% C) 19.04% D) 20.03% 55. The cost of capital for a project in Spain should A) equal the parents weighted average cost of capital B) equal the required return for a similar investment in the U.S. C) equal the minimum rate of return necessary to in duce investors to buy or hold the firms stock D) be a function of the riskiness of the project itself 56. The efficient frontier is the set of portfolios that has the ________ standard deviation for its level of expected return. A) smallest possible B) greatest possible C) most feasible D) least correlated

57. The difference between a global fund and an international fund is the global fund A) invests anywhere in the world excluding the United States B) invests anywhere in the world including the United States C) invests only outside the United States D) invests in individual countries 58. Systematic risk refers to A) The risk that remains even after investors fully diversify their portfolio holdings. B) The risk that unanticipated changes in the exchange rate may reduce the diversification potential of international investing. C) The increase in risk that international diversification offers to domestic portfolios. D) None of the above 59. Other things equal, a country will be perceived to have more political risk A) The less integrated it is into the world system B) The more stable a countrys government is. C) The more stable its neighboring countries are. D) With lessening income inequality. 60. Insurance for political risk exists. How would you incorporate the insurance premium into the capital budgeting process? A) Subtract the insurance premium from the expected cash flows from the project when computing its NPV B) Raise the cost of capital (discount rate) C) Adjust the NPV downward by a subjective amount. D) None of the above.

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