Cross-Border Financial Management Practice Exam
Course Introduction
Cross-Border Financial Management explores the principles, strategies, and challenges involved in managing finance in a global context. The course covers topics such as foreign exchange markets, exchange rate risk, international capital budgeting, global financing options, and strategies for managing multinational cash flows. Students learn how to assess the impact of political, economic, and legal environments on cross-border financial decisions, understand regulatory considerations, and develop effective risk management approaches for firms operating internationally. Through case studies and practical examples, the course equips students with the analytical tools and frameworks needed to make informed financial decisions in a highly interconnected global marketplace.
Recommended Textbook
Fundamentals of Multinational Finance 5th Edition by Michael H. Moffett
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Chapter 1: Multinational Financial Management: Opportunities and Challenges
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Sample Questions
Q1) Of the following, which would NOT be considered a way that government interferes with comparative advantage?
A) tariffs
B) managerial skills
C) quotas
D) other non-tariff restrictions
Answer: B
Q2) According to the authors, which of the following groups or securities are at the "heart" to the global capital markets?
A) debt securities issued by governments
B) bank loans and corporate bons
C) equity securities
D) derivative securities
Answer: A
Q3) Domestic currencies of one country on deposit in a second country are called
A) export deposits.
B) eurocurrencies.
C) import deposits.
D) forocurrencies.
Answer: B
Page 3
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Chapter 2: The International Monetary System
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Q1) Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.
Answer: C
Q2) Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).
A)True
B)False
Answer: True
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4
Chapter 3: The Balance of Payments
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Q1) In 2001 the United States posted a current account deficit of -$393 billion. The bulk of the negative value came from
A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.
Answer: C
Q2) China holds a massive amount of foreign exchange reserves. As of 2010 they held nearly $2,500 billion. This huge foreign exchange reserve should allow China to A) manage the value of the Chinese yuan to maintain competitiveness in world markets. B) maintain a relatively stable managed fixed exchange rate for the yuan for years to come.
C) remain a very important player in world trade for at least the next several years.
D) All of the above.
Answer: D
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5
Chapter 4: Financial Goals and Corporate Governance
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Q1) According to an article in the French newspaper Le Figaro, French firms that are mostly privately held are out-performed by firms that are more widely held public firms. Note: In this context performance is measured by return to the owners.
A)True
B)False
Q2) MultiProducts, Inc. has two classes of common stock. Class A has 1 million shares with 10 votes per share. Class B has 2 million shares with 1 vote per share. If the dividends per share are equal for both class A and B stock, then Class A shareholders have ________ of the votes and ________ of the dividends.
A) 33.33%; 33.33%
B) 33.33%; 83.33%
C) 83.33%; 83.33%
D) 83.33%; 33.33%
Q3) Warren Buffett and his investment firm Berkshire Hathaway is an outstanding example of impatient capital investing.
A)True
B)False
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Chapter 5: The Foreign Exchange Market
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Q1) The foreign exchange market has expanded significantly in the last 20 years. What is the volume of swap, forward, and spot transactions in the market as of the most recent survey data (April 2013)?
Q2) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.
A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction
Q3) NDFs are traded and settled outside the country of the subject currency, and therefore are beyond the control of the country's government.
A)True
B)False
Q4) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.
Q5) What are some of the reasons central banks and treasuries enter the foreign exchange markets, and in what important ways are they different from other foreign exchange participants?
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Chapter 6: International Parity Conditions
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Q1) The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.
A) international Fisher Effect
B) absolute PPP
C) interest rate parity
D) the law of one price
Q2) A Macedonian homeowner deciding for a Euro-denominated, lower rate mortgage is
A) effectively initiating long term covered interest arbitrage.
B) should start seeking US dollar salary to mitigate the risk of falling behind the payment schedule.
C) creating debt service FX exposure for the whole life of the loan.
D) remaining "uncovered" unless she has sub-lease contract denominated in Macedonian Denar.
Q3) Empirical tests fail to conclusively demonstrate that PPP is an accurate predictor of future exchange rates.
A)True
B)False
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Chapter 7: Foreign Currency Derivatives and Swaps
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Q1) Other things equal, the price of an option goes up as the volatility of the option decreases.
A)True
B)False
Q2) A call option whose exercise price is less than the spot rate is said to be
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.
Q3) Which of the following statements regarding currency futures contracts and forward contracts is NOT true?
A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.
B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.
C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.
D) All of the above are true.
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9
Chapter 8: Foreign Exchange Rate Determination
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Q1) In the long run, exchange rates will never follow a fundamental equilibrium path as suggested by the fundamental theories of exchange rate determination.
A)True
B)False
Q2) The Asian Currency crisis appeared to begin in
A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.
Q3) ________ is the alteration of economic or financial fundamentals which are thought to be drivers of capital to flow in and out of specific currencies.
A) Proportional intervention
B) Direct intervention
C) Indirect intervention
D) Hopeless intervention
Q4) Assume your country has a balance of payments surplus. How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?
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Chapter 9: Transaction Exposure
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Q1) Refer to Instruction 9.1. If Plains States chooses to hedge its transaction exposure in the forward market, it will ________ euro 1,250,000 forward at a rate of ________.
A) sell; $1.38/euro
B) sell; $1.40/euro
C) buy; $1.38/euro
D) buy; $1.40/euro
Q2) US firm submitted a fixed bid for a Euro multimillion project in Ukraine. The contract will be awarded in 12 months and the company knows there will be no advance payments. The company
A) should pay the premium for a 3 months put currency option to hedge the quotation exposure.
B) should write 3 months put currency option, receive the premium and roll it forward.
C) should buy 12 months put option and limit the loss to the premium amount if the bid gets rejected.
D) should get 1 year Euro denominated loan equal to the bid amount.
Q3) List and define the three types of foreign exchange exposure presented by your authors.
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Chapter 10: Translation Exposure
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Q1) Under the current rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.
A)True
B)False
Q2) Translation exposure measures
A) changes in the value of outstanding financial obligations incurred prior to a change in exchange rates.
B) the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.
C) an unexpected change in exchange rates impact on short run expected cash flows.
D) none of the above.
Q3) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.
A)True
B)False
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Chapter 11: Operating Exposure
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Sample Questions
Q1) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.
A) forward loan
B) currency hedge
C) counterparty
D) currency swap
Q2) Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk?
A) matching currency cash flows
B) currency swaps
C) remaining a purely domestic firm
D) parallel loans
Q3) Under conditions of equilibrium, management would use ________ exchange rate as an unbiased predictor of future spot rates when preparing operating budgets.
A) the current spot
B) the forward rate
C) the black market
D) none of the above
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13
Chapter 12: The Global Cost and Availability of Capital
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Q1) In theory MNE should be able to support higher debt ratios and have lower associated costs.
A)True
B)False
Q2) Capital market imperfections leading to financial market segmentation include A) political risks.
B) corporate governance differences.
C) regulatory barriers.
D) All of the above.
Q3) Internationally diversified portfolios often have a lower rate of return and almost always have a higher level of portfolio risk than their domestic counterparts.
A)True
B)False
Q4) Capital market segmentation is a financial market imperfection caused mainly by A) government constraints.
B) institutional practices.
C) investor perceptions.
D) all of the above
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Chapter 13: Raising Equity and Debt Globally
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Q1) According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital.
A) increase
B) decrease C) have no impact on
D) none of the above
Q2) For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. Beyond some optimal level, the cost of capital increases as the amount of debt ________.
A) decreases; increases
B) decreases; decreases C) increases; increases
D) increases; decreases
Q3) Which financial economists are most closely associated with the financial theory of optimal capital structure?
A) Modigliani and Miller
B) Fama, Fisher, Jensen, and Roll
C) Black and Scholes
D) Markowitz and Sharpe
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Page 15
Chapter 14: Multinational Tax Management
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Q1) A value-added tax has gained widespread use in Western Europe, Canada, and parts of Latin America.
A)True
B)False
Q2) Jensen Optimetrics Inc. is based in a country with a territorial approach to taxation but generates 100% of its income in a country with a worldwide approach to taxation. The tax rate in the country of incorporation is 25%, and the tax rate in the country where they earn their income is 50%. In theory, and barring any special provisions in the tax codes of either country, Jensen should pay taxes at a rate of
A) 75%.
B) 62.5%.
C) 0%.
D) 50%.
Q3) What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose this form of taxation has not been widely accepted in the United States?
Q4) Explain the worldwide and territorial approaches of national taxation. The authors state that the United States uses both approaches. How can this be? Give an example of each taxation approach.
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Chapter 15: International Trade Finance
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Q1) When a confirmed letter of credit is used, the exporting firm gains because
A) the government in effect subsidizes shipping costs.
B) the time involved in shipping is generally reduced.
C) the firm can sell against the promise of a local bank rather than a firm.
D) the exporting firm is considered of higher risk.
Q2) Which of the following purposes is NOT served by the bill of lading?
A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.
Q3) What is the trade dilemma and how is the dilemma generally solved?
Q4) The letter of credit is designed to
A) allow the buyer to obtain title to the goods before they are received.
B) free the seller from concerns over the payment abilities of the buyer.
C) free the seller from any merchandise guarantees.
D) be issued by the bank at the request of an exporter.
Q5) What is the Import-Export Bank and how can it aid in export financing?
Q6) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?
Page 17
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Chapter 16: Foreign Direct Investment and Political Risk
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Q1) Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.
A)True
B)False
Q2) Joint ventures are a more common FDI than wholly owned subsidiaries.
A)True
B)False
Q3) Blocked funds are cash flows that
A) come in regular intervals in standardized amounts or blocks.
B) have been restricted in transfer out of a local country.
C) come from a certain sector or region of the world.
D) none of the above.
Q4) Which of the following is NOT a proactive financial strategy related to the OLI paradigm in explaining FDI?
A) strategies to gain lower global cost of capital
B) strategies to reduce global taxation
C) strategies to reduce operating and transaction exposure
D) All of the above are proactive strategies.
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Chapter 17: Multinational Capital Budgeting and Cross-Border Acquisitions
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Sample Questions
Q1) What is project financing and what are the factors critical to its success?
Q2) When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm repatriating dividends to its parent.
A)True
B)False
Q3) ________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.
A) Exchange risk
B) Foreign risk
C) Political risk
D) Unnecessary risk
Q4) Refer to Table 17.1. Which of the following best summarizes the preliminary results of the investment analysis for the two prospective investments?
A) The British investment should be accepted, the European investment rejected.
B) The British investment is superior to the European investment.
C) Both investments are acceptable.
D) None of the above is true.
Page 19
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