IFM EXAM1 -Madura

IFM -Madura Multiple Choice  Identify the letter of the choice that best completes the statement or answers the question.

 ____  ____

1. Which Which of the the follow following ing theo theorie riess ident identifi ifies es speci speciali alizat zation ion as as a reason reason for for interna internatio tional nal busi busines ness? s? a. theory theory of compar comparati ative ve advant advantage age..  b.  b. impe imperf rfec ectt marke markets ts theo theory ry.. c. prod produc uctt cycl cyclee theo theory ry.. d. none none of the the abo above ve..

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2. A produc productt cycle cycle is the the proce process ss by whic which h a firm firm provide providess a specia specializ lized ed sales sales or or servi service ce strat strategy egy,, suppo support rt assistance, and possibly an initial investment in the franchise in e xchange for periodic fees. a. true. b. false.

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3. Which Which of of the follow following ing is not not a prov provisi ision on or or result result of the the Singl Singlee Europ European ean Act of 1987 1987?? a. increased increased regulatory regulatory uniformity uniformity among European European count countries. ries.  b. the phasing phasing in in of a common common currency currency for for all Europea European n countries countries by by 1992. 1992. c. the removal removal of many taxes on goods goods traded traded betwee between n European European count countries. ries. d. firms' firms' abili ability ty to achie achieve ve econo economie miess of scale. scale. e. all all of of th the abo above ve..

 ____  ____

4. Which of the the follow following ing is not not mentio mentioned ned in the the text text as as an additiona additionall risk risk resulti resulting ng from internati international onal business? business? a. exch exchan ange ge rate rate fluc fluctu tuat atio ions ns..  b.  b. poli politi tica call risk risk.. c. inte intere rest st rate rate risk risk.. d. exposu exposure re to foreig foreign n econ economi omies. es.

 ____  ____

5. Due to to the larg larger er oppor opportun tunity ity set set of fund funding ing sou sources rces around around the the world world from from whic which h an MNC MNC can choo choose, se, an an MNC may be able to obtain capital at a lower cost than a purely domestic firm. a. true. b. false.

 ____  ____

6. Althou Although gh MNCs MNCs may need need to conve convert rt curren currencie ciess occasi occasiona onally lly,, they they do not not face face any exch exchang angee rate risk risk,, as exchange rates are stable over time. a. true. b. false.

 ____  ____

7. If the home home curren currency cy begin beginss to appre apprecia ciate te agains againstt other other curren currencie cies, s, this this should should ____ _______ ______ _____ __ the the curren currentt account balance, other things equal (assume that substitutes are readily available in the countries, and that the  prices charged by firms remain the same). a. increase  b.  b. have have no impa impact ct on c. reduce d. all of the the abov abovee are are equal equally ly poss possibl iblee

 ____  ____

8. Accord According ing to to the text text,, intern internati ationa onall trade trade (export (exportss plus plus import importss combine combined) d) as a perce percenta ntage ge of GDP GDP is: is: a. higher higher in in the U.S. U.S. than than in Euro Europea pean n countr countries ies..  b. lower lower in the the U.S. U.S. than in in Europe European an count countries ries.. c. higher higher in the U.S. U.S. than in in about about half the the European European countri countries, es, and lower lower in the the U.S. than than the others. d. about the same in the the U.S. U.S. as in Europe European an countri countries. es.

 ____  ____

9. Like Like the Inter Internat nation ional al Moneta Monetary ry Fund Fund (IMF) (IMF),, the _____ ________ ______ ______ ____ _ is compo composed sed of of a collect collection ion of of nations nations as as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. a. World Bank   b. Intern Internati ationa onall Financia Financiall Corporat Corporation ion (IFC) (IFC) c. World World Trade Trade Organi Organizat zation ion (WTO) (WTO) d. Internatio International nal Developme Development nt Associati Association on (IDA) e. Bank Bank for for Intern Internati ationa onall Settle Settlemen ments ts (BIS) (BIS)

 ____  ____ 10. A weakening weakening of the the U.S. U.S. dollar dollar with with respect respect to the the British British pound pound would likely likely reduce reduce the the U.S. U.S. exports exports to to Britain and increase U.S. imports from Britain. a. true. b. false.  ____  ____ 11. The World World Bank Bank extends extends loans loans only only to developed developed nations, nations, while while the the Internati International onal Develo Development pment Associati Association on (IDA) extends loans only to developing nations. a. true. b. false.  ____  ____ 12. Portfolio Portfolio invest investment ment represe represents nts transac transactions tions involving involving long-term long-term financ financial ial assets assets (such (such as as stocks stocks and and bonds) bonds)  between countries that do not affect the transfer of control. a. true. b. false.  ____  ____ 13. Intracompan Intracompany y trade trade represen represents ts the the exportin exporting g of produc products ts by one count country ry to other other countrie countriess below below cost. cost.

a. true. b. false.  ____ 14. A tariff is a maximum limit on imports. a. true. b. false.  ____ 15. Eurocurrency market transactions normally represent: a. the equivalent of $1 million or more.  b. the equivalent of $1,000 to $10,000. c. the equivalent of between $10,000 and $100,000. d. the equivalent of between $100,000 and $200,000.  ____ 16. From 1944 to 1971, the exchange rate between any two currencies was typically: a. fixed within narrow boundaries.  b. floating, but subject to central bank intervention. c. floating, and not subject to central bank intervention. d. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.  ____ 17. Which of the following is not true regarding the Bretton Woods Agreement? a. It called for fixed exchange rates between currencies.  b. Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels. c. The agreement lasted from 1944 until 1971. d. Each country used gold to back its currency. e. All of the above are true regarding the Bretton Woods Agreement.  ____ 18. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? a. 73.75. b. 125. c. 1.69. d. 0.014. e. none of the above.  ____ 19. The Single European Act and the Basel Accord prevented a trend toward increased globalization in the  banking industry.

a. true. b. false.  ____ 20. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to  place _______ pressure on the value of the Australian dollar with respect to the U.S. dollar. a. upward b. downward c. either upward or downward (depending on the degree of the increase in Australian inflation) d. none of the above; there will be no impact  ____ 21. Currency futures contracts sold on an exchange: a. contain a commitment to the owner, and are standardized.  b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.  ____ 22. Which of the following is true? a. The futures market is primarily used by speculators while the forward market is primarily used for hedging.  b. The futures market is primarily used for hedging while the forward market is primarily used for speculating. c. The futures market and the forward market are primarily used for speculating. d. The futures market and the forward market are primarily used for hedging.  ____ 23. European currency options can be exercised _______; American currency options can be exercised _______. a. any time up to the expiration date; any time up to the expiration date  b. any time up to the expiration date; only on the expiration date c. only on the expiration date; only on the expiration date d. only on the expiration date; any time up to the expiration date  ____ 24. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This  put option can be referred to as: a. in the money.  b. out of the money. c. at the money. d. at a discount.

 ____ 25. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency  positions? a. forward contracts.  b. futures contracts. c. non-deliverable forward contracts. d. options. e. all of the above are instruments used to cover foreign currency positions.  ____ 26. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. a. true. b. false.  ____ 27. 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.  ____ 28. The highest amount a buyer of a call or a put option can lose is the exercise price. a. true. b. false.  ____ 29. A primary result of the Bretton Woods Agreement was: a. the establishment of the European Monetary System (EMS).  b. establishing specific rules for when tariffs and quotas could be imposed by governments. c. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values. d. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).  ____ 30. A weaker dollar places _______ pressure on U.S. inflation, which in turn places _______ pressure on U.S. interest rates, which places _______ pressure on U.S. bond prices. a. upward; downward; upward  b. upward; downward; downward c. upward; upward; downward d. downward; upward; upward

 ____ 31. The euro is the currency: a. adopted in all western European countries as of 1999.  b. adopted in all eastern European countries as of 1999. c. adopted in all European countries as of 1999. d. none of the above.  ____ 32. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? a. sell dollars for foreign currency.  b. buy dollars with foreign currency. c. lower interest rates. d. none of the above.  ____ 33. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis? a. Thailand. b. Indonesia. c. Russia. d. China. e. Malaysia.  ____ 34. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system. a. true. b. false.  ____ 35. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. a. true. b. false.  ____ 36. If interest rate parity exists, then _______ is not feasible. a. forward realignment arbitrage  b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage

 ____ 37. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should _______, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should _______. a. appreciate; depreciate  b. depreciate; appreciate c. depreciate; depreciate d. appreciate; appreciate e. remain stable; appreciate  ____ 38. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for  Australian dollars (A$). 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? a. A$39.93.  b. A$25,043.48. c. A$553.00. d. none of the above.  ____ 39. Assume the following information: You have $900,000 to invest Current spot rate of Australian dollar (A$) 180-day forward rate of the Australian dollar  180-day interest rate in the U.S. 180-day interest rate in Australia

= =

$.62 $.64

= =

3.5% 3.0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? a. $56,903. b. $61,548. c. $27,000. d. $31,500.  ____ 40. Because there are sometimes no substitutes for traded goods, this will: a. reduce the probability that PPP shall hold.  b. increase the probability that PPP shall hold. c. increase the probability the IFE will hold. d. B and C.  ____ 41. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:

a. the income differential.  b. the forward discount or premium. c. the inflation differential. d. none of the above.  ____ 42. According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be _______ than other countries, and its currency will _______. a. lower; strengthen  b. lower; weaken c. higher; weaken d. higher; strengthen  ____ 43. Which of the following is true according to the text? a. Forecasts in recent years have been very accurate.  b. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias. c. Forecasting performance has improved substantially in recent years. d. None of the above.  ____ 44. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true? a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.  b. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. c. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate. d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.  ____ 45. If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all relevant private information, then _______ would be refuted. a. weak-form efficiency   b. semistrong-form efficiency c. strong-form efficiency d. A and B

e. B and C  ____ 46. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: S t  - a0 + a1 F t-1 +  µ  t ,

where S t  is the spot rate of the pound in year  t and F t-1 is the forward rate of the pound in year  t-1. Regression results reveal coefficients of  a0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have  ______________ the realized spot rate. a. overestimated  b. underestimated c. correctly estimated d. none of the above  ____ 47. Which of the following is not a method of forecasting exchange rate volatility? a. using the absolute forecast error as a percentage of the realized value to improve your  forecast.  b. using the volatility of historical exchange rate movements as a forecast for the future. c. using a time series of volatility patterns in previous periods. d. deriving the exchange rate's implied standard deviation from the currency option pricing model.  ____ 48. When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors. a. true. b. false.  ____ 49. Foreign exchange markets appear to be strong-form efficient. a. true. b. false.  ____ 50. Market-based forecasting involves the use of historical exchange rate data to predict future values. a. true. b. false.  ____ 51. A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting. a. true. b. false.

 ____ 52. Economic exposure can affect: a. MNCs only.  b. purely domestic firms only. c. A and B. d. none of the above.  ____ 53. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should: a. increase local sales as it reduces foreign competition in local markets.  b. increase the firm's exports denominated in the local currency. c. increase the returns earned on the firm's foreign bank deposits. d. increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above.  ____ 54. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars? a. $500,000 outflow.  b. $500,000 inflow. c. $275,000 inflow. d. $275,000 outflow.  ____ 55. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately: a. 17.28%. b. 13.15%. c. 14.50%. d. 12.04%.  ____ 56. Two highly negatively correlated currencies act almost as if they are the same currency. a. true. b. false.  ____ 57. Translation exposure is less of a concern when earnings are not remitted by the subsidiary to the parent. a. true.

 ____ 58. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency. a. true. b. false.  ____ 59. A reduction in hedging will probably reduce transaction exposure. a. true. b. false.  ____ 60. If a Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen  but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be: a. a money market hedge.  b. a forward sale of yen. c. purchasing yen call options. d. purchasing yen put options. e. selling yen put options.  ____ 61. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: a. sell euros forward.  b. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged.  ____ 62. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of  350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is: Future Spot Rate $.46

Probability 20%

$.48

30%

$.52

50%

The 90-day forward rate of the Australian dollar is $.50. What is the probability that the put option will be exercised (assuming Arizona purchased it)? a. 0%.

b. 80%. c. 50%. d. none of the above.  ____ 63. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries. a. true. b. false.  ____ 64. A money market hedge involves taking a money market position to cover a future payables or receivables  position. a. true. b. false.  ____ 65. MNCs generally do not perceive their foreign exchange management as a profit center. a. true. b. false.  ____ 66. With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______. a. are not tax deductible; are taxed  b. are tax deductible; are taxed c. are not tax deductible; are not taxed d. are tax deductible; are not taxed  ____ 67. Assume the correlation coefficient between the returns on existing projects and the return on a proposed foreign project is 1. Also assume the returns on existing projects and the new project are equal, and that the existing projects have a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ___________ the variance of the firm's overall returns. a. decrease b. increase c. decrease or increase, depending on the exact size of the returns and standard deviations d. none of the above  ____ 68. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing  plants) in foreign countries. a. true. b. false.  ____ 69. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the  parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

a. strengthening euro b. stable euro c. weak euro d. B and C are both ideal.

Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 NOK10,000,000

Year 2 NOK15,000,000

Year 3 NOK17,000,000

Year 4 NOK20,000,000

The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 $.13

Year 2 $.14

Year 3 $.12

Year 4 $.15

 ____ 70. Refer to Exhibit 14-1. What is the net present value of the Norwegian project? a. -$803,848.  b. $5,803,848. c. $1,048,829. d. none of the above.  ____ 71. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project. a. true. b. false.

Exhibit 15-1 Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

•

Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes  paid.

•

Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the

following two years. •

Cost of goods sold are expected to be 60% of revenues.

•

Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

•

The Malaysian tax rate on the target's earnings is expected to be 30%.

•

Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

•

The target will need MYR9 million in cash each year to support existing operations.

•

The target's current stock price is MYR35 per share. The target has 11 million shares outstanding.

•

Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the M alaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23.

•

Klimewsky's required rate of return on similar projects is 13%.

 ____ 72. Refer to Exhibit 15-1. Based on the information provided above, the net present value of the Malaysian target is $_______ million. a. 155.9 b. 111.5 c. 138.0 d. 143.0 e. none of the above  ____ 73. Most countries discourage hostile takeovers. a. true. b. false.  ____ 74. Premiums required to entice a target's board of directors to approve an acquisition commonly range from 60  percent to 80 percent of the target's market price. a. true. b. false.

 ____ 75. If potential acquirers are based in different countries, their required rates of return when considering a specific target will only vary if the desired use of the target is different. a. true. b. false.  ____ 76. Even after an MNC's accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In fact, this analysis may indicate that a previously accepted project should be divested. a. true. b. false.  ____ 77. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary's ability to generate sufficient sales there. The country risk characteristic that would best address this concern is: a. the host government's tax rates charged on remitted earnings.  b. the possibility of blocked funds. c. the state of the economy in Germany. d. the possibility of a withholding tax imposed by the German government.  ____ 78. According to the text, MNCs: a. use only debt financing in foreign countries to support foreign subsidiaries.  b. use only equity financing in foreign countries to support foreign subsidiaries. c. use only parent financing in foreign countries to support foreign subsidiaries. d. none of the above.  ____ 79. According to the text, an MNC's "global" target capital structure is: a. always debt-intensive.  b. always equity-intensive. c. sometimes different from an MNC's "local" capital structures (at subsidiaries). d. none of the above.  ____ 80. According to the text: a. the cost of debt for each country is somewhat stable over time.  b. the cost of debt for countries change over time, and these changes are negatively correlated. c. the cost of debt for countries change over time, and these changes are positively correlated. d. the cost of debt for countries change over time, and are not correlated.  ____ 81. MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on an average stock is 13%. What is the required rate of return on MNC stock?

a. 21%. b. 41%. c. 16%. d. 13%. e. none of the above.  ____ 82. In general, MNCs probably prefer to use ____________ foreign debt when their foreign subsidiaries are subject to ___________ local interest rates. a. more; low b. more; high c. less; low d. B and C e. none of the above  ____ 83. If the currency denominating a foreign bond depreciates against the firm's home currency, the funds needed to make coupon payments will increase. a. true. b. false.  ____ 84. An interest rate swap is commonly used by an issuer of fixed-rate bonds to: a. convert to floating-rate debt.  b. hedge exchange rate risk. c. lock in the interest payments on debt. d. remove the default risk of its debt.  ____ 85. Minnie Corp. has decided to issue three-year bonds denominated in 5,000,000 Slovakian koruna (SKK) at  par. The bonds have a coupon rate of 17%. If the koruna is expected to appreciate from its current level of  $.03 to $.032, $.034, and $.035 in years 1, 2,and 3, respectively, what is the financing cost of these bonds? a. 17%. b. 23.18%. c. 22.36%. d. 23.39%.  ____ 86. In a(an) ___________ swap, two parties agree to exchange payments associated with bonds; in a(an)  ____________ swap, two parties agree to periodically exchange foreign currencies. a. interest rate; currency  b. currency; interest rate

c. interest rate; interest rate d. currency; currency  ____ 87. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:

Good Company Bad Company

Fixed Rate Bond 10% 12%

Variable Rate Bond LIBOR + 1% LIBOR + 1.5%

Given this information: a. an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.  b. an interest rate swap attractive to both parties could result if Good Company agreed to  provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. c. an interest rate swap attractive to both parties could result if Bad Company agreed to  provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%. d. none of the above.  ____ 88. If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros, it would sell euros forward. a. true. b. false.  ____ 89. The __________ offers insurance against political and credit risks related to credit from international trade. a. Domestic International Sales Corporation (DISC)  b. Private Export Funding Corporation (PEFCO) c. Export-Import Bank  d. Foreign Credit Insurance Association (FCIA)  ____ 90. __________ was established in 1934 with the intention to facilitate Soviet-American trade. a. Domestic International Sales Corporation (DISC)  b. Private Export Funding Corporation (PEFCO) c. Export-Import Bank  d. Foreign Credit Insurance Association (FCIA)  ____ 91. The objectives of the Export-Import Bank of the United States include the assumption of underlying credit risk and country risk to encourage private lenders to finance export trade and the provision of direct loans to foreign buyers when private lenders are unwilling to do so.

a. true. b. false.  ____ 92. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year  forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan? a. about 12.4%. b. about 7.1%. c. about 13.5%. d. about 10.3%. e. about 11.3%.

Exhibit 20-3 Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a  portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:

Mean effective financing rate of Japanese yen for six months Mean effective financing rate of Sudanese dinar for six months Standard deviation of Japanese yen's effective financing rate Standard deviation of Sudanese dinar's effective financing rate Correlation coefficient of effective financing rates of these two currencies

4% 1% .10 .20 .23

 ____ 93. Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron? a. 2.24%. b. 14.98%. c. 2.89%. d. 17.00%. e. none of the above.  ____ 94. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency. a. true. b. false.  ____ 95. Netting can achieve all but one of the following: a. Cross border transactions between subsidiaries are reduced.  b. Transactions costs are reduced.

c. Currency conversion costs are reduced. d. Transaction exposure is eliminated.  ____ 96. According to the text: a. banks in most non-U.S. countries are as capable as the U.S. in facilitating cash transfers and most other cash management operations for MNCs.  b. banks in most non-U.S. countries are more advanced than the U.S. in facilitating cash transfers for MNCs. c. an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists. d. none of the above.  ____ 97. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time. a. true. b. false.  ____ 98. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been: a. negative. b. zero. c. positive, but less than the interest rate of their respective countries. d. more than the interest rate of their respective countries.  ____ 99. Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to some limit. a. true. b. false.  ____ 100. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate. a. true. b. false.

IFM -Madura Answer Section MULTIPLE CHOICE

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41.

A B B C A B C B B B B A B B A A D D B B A A D B E A A B C C D B D A B C A A A A C

42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.

C D B D B A A B B B C E D B B A B B D A C B A A A B A A C A B A B B A C D C C A A B A D A B

88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.

B D C A E B B D D A D A A