Cross-Border Financial Management Review Questions
Course Introduction
Cross-Border Financial Management focuses on the concepts, challenges, and practical applications involved in managing financial operations across international boundaries. The course explores topics such as foreign exchange markets, international financial instruments, global capital budgeting, cross-border cash flow management, risk mitigation strategies, and regulatory frameworks affecting multinational enterprises. Through case studies and real-world examples, students gain insights into managing currency risk, financing international projects, optimizing global capital structures, and understanding the impact of geopolitical events on financial decision-making. This course prepares students to navigate the complexities of global finance and make informed financial decisions in a multinational context.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
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Page 2
Chapter 1: Globalization and the Multinational Corporation
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Q1) The main resources of the International Monetary Fund are provided by
A) the members of the World Bank.
B) its member countries primarily through payments of quotas.
C) members of the Organization for Economic Cooperation and Development.
D) the Bank for International Settlements.
Answer: B
Q2) What are some of the basic beliefs of the anti-globalists?
Answer: The anti-globalist movement targets multinational corporations as one of the main villains of the globalization phenomenon that they believe is detrimental to the poor countries,their workers,and to disadvantaged people in developed countries.Laissez-faire capitalism is another cause of the detrimental side effects of globalization to the anti-globalists.
Q3) According to the United Nations Conference on Trade and Development,what percentage of China's GDP in 2009 was attributed to the trade sector?
A) 70%
B) 60%
C) 65%
D) 50%
Answer: D
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Chapter 2: The Foreign Exchange Market
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Q1) Which one of the following firms dominates the foreign exchange markets?
A) No one firm dominates.
B) Deutsche Bank
C) UBS
D) Citigroup
Answer: A
Q2) What currency currently serves as the world's primary vehicle currency?
A) Japanese yen
B) British pound
C) U.S. Dollar
D) European euro
Answer: C
Q3) What is the name of the computer network in which member banks globally send and receive messages pertaining to foreign exchange transactions?
A) Fed funds
B) SWIFT
C) CHIPS
D) The Automated Clearing House (ACH)
Answer: B
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Page 4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) Why are the bid-ask spreads larger in the forward market than in the spot market?
A) because the forward market is less liquid than the spot market
B) because the spot market is more volatile than the forward market
C) because the forward market is more liquid than the spot market
D) because the spot market is less liquid than the forward market
Answer: A
Q2) What is the name of the exchange rate specified in the forward contract?
A) spot rate
B) forward rate
C) future exchange rate
D) cross-rate
Answer: B
Q3) How is the forward value date calculated on a 90-day forward contract?
Answer: To find the delivery date for a 90-day forward contract,one first finds the spot value date,which is typically two business days in the future relative to the day that the contract is made.Then,to find the forward value date,one goes to the calendar date in three months corresponding to the calendar date of the spot value date.If that calendar date in three months is a legitimate business day in both countries,that date is the forward value date.
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Page 5
Chapter 4: The Balance of Payments
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Q1) Into what subcategory in the current account do you find the export and import of education,insurance,consulting,telecommunications,royalties on films,etc?
A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Q2) In a freely floating exchange rate system,if the capital account is running a deficit
A) the balance of payments must run a deficit.
B) the balance of payments must be zero.
C) the current account must run a surplus.
D) both B and C.
Q3) Purchases and sales of foreign assets by domestic residents would appear in the ________ account of the balance of payments.
A) current
B) capital
C) trade merchandise
D) official settlement
Q4) Explain the double-entry system of the balance of payments.
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6
Chapter 5: Exchange Rate Systems
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Q1) The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a
A) currency board.
B) floating exchange rate.
C) target zone.
D) pegged exchange rate system.
Q2) When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.
A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves
Q3) What is the name for the composite currency that consists of various units of other currencies?
A) pegged currency
B) seignorage
C) basket of currency
D) special drawing rights
Q4) Describe the Bretton Woods currency system?
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Chapter 6: Interest Rate Parity
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Q1) The difference between the interest rate that a bank charges on its loans and the interest rate that the banks pay their depositors is known as the
A) percent spread.
B) arbitrage opportunity.
C) bid-ask spread.
D) covered interest arbitrage opportunity.
Q2) If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.
A) liability
B) asset
C) forward contract
D) foreign bank account
Q3) Which one of the following would be the most logical reason to use a synthetic forward contract to hedge?
A) forward contracts are not available in the currency of choice
B) when time horizons are short, forward contracts can be expensive
C) the underlying transaction is too risky
D) the underlying transaction gives you an asset
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Page 8
Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) Which one of the following is the only determinant of volatility in the forward currency markets?
A) interest rate parity
B) economic recovery
C) political turmoil
D) variance of the future exchange rates
Q2) What does the "carry trade" term mean?
A) Borrow in the domestic currency to earn only the higher yield of the dollar implied by the regression.
B) Borrow in the foreign currency to earn only the expected capital appreciation of the dollar implied by the regression.
C) Borrow in the domestic currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.
D) Borrow in the foreign currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.
Q3) What is the main determinant of the volatility of forward market returns?
Q4) If interest rate parity prevails,what is the return from a hedged foreign currency investment?
9
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?
Q2) The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the
A) relative purchasing power parity
B) equilibrium purchasing power parity
C) absolute purchasing power parity
D) real exchange rate equilibrium
Q3) In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as
A) mark to market
B) interest rate arbitrage
C) pricing to market
D) speculation
Q4) If people expect that their future purchasing power will decline,what will happen to the exchange rate today?
Q5) Explain what is meant by the real exchange rate?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) The only way a firm does not have real exchange risk is in the case of the firm that is
A) completely diversified internationally
B) a net exporter
C) a net importer
D) completely domestic
Q2) In the face of a currency depreciation,if the firm maintains its foreign currency price,it will ________.
A) lose its market share but gain profits
B) lose its market share and lose profits
C) maintain its market share and gain profits
D) maintain its market share but lose profits
Q3) When would be the best time for a firm to enter a foreign market as an exporter?
A) given a change in real exchange rates, when foreign currencies are weak
B) given a change in real exchange rates, when foreign currencies are strong
C) given no change in real exchange rates, when foreign currencies are weak
D) given no change in real exchange rates, when foreign currencies are strong
Q4) What determines how much a foreign producer allows the dollar price of a product sold in the United States to be affected by a change in the real exchange rate?
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:
A) identical nominal returns imply very different real returns for investors in different countries.
B) returns in different currencies can have different currency risk premiums.
C) political risks or the threat of capital controls prevent investors from taking advantage of higher returns in other countries.
D) PPP deviations are not sizable and prolonged.
Q2) ________ techniques are typically based on formal economic models of exchange rate determination.
A) Technical analysis
B) Fundamental analysis
C) Exchange rate forecasting
D) Mean absolute error
Q3) Construct a list of a country's economic statistics you would assemble to help determine the probability of a devaluation of its currency within the coming year.
Q4) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
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Chapter 11: International Debt Financing
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Q1) The sources of funds for a multinational corporation and its subsidiaries can be subdivided into two categories,________ and ________.
A) internally-generated, externally generated
B) retained earnings, internally-generated
C) capital markets-generated, externally generated
D) retained earnings, externally-generated
Q2) What is the name given to the straight fixed-rate bond issued in one currency which pays coupon interest in that same currency,but the promised repayment of principal at maturity is denominated in another currency?
A) international bond
B) dual-currency bond
C) equity-related bond
D) foreign bond
Q3) How is the final payment made for a dual-currency bond?
Q4) Banks that operate in the Eurocurrency markets are known as ________.
A) eurobanks
B) eurocredit banks
C) euronote banks
D) international banking facilities
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Chapter 12: International Equity Financing
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Q1) How have global stock markets adjusted to competitive pressure from global investors?
Q2) With respect to stock market organization,what do the countries of Belgium,France,Spain,Italy and Greece have in common?
A) private bourse
B) public bourse
C) price-driven trading systems
D) order-driven trading systems
Q3) When one corporation owns shares in another,the practice is known as ________.
A) cross-listing
B) cross-market
C) cross-holding
D) diversification
Q4) All of the following are true about an American Depository Receipt EXCEPT:
A) the depositary bank converts all dividends and other payments into U.S. dollars.
B) there are no custodial fees.
C) shares are held in custody by a U.S. depository bank.
D) it represents a specific number of shares in the home market.
Q5) What is distinguishes a public from a banker's bourse?
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Chapter 13: International Capital Market Equilibrium
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Q1) Today in an increasingly globalized world,it makes more sense to use an internationally diversified portfolio of securities as the market portfolio.This CAPM is called the ________.
A) international CAPM
B) domestic CAPM
C) country CAPM
D) world CAPM
Q2) When a country unexpectedly opens its capital markets to the world economy,the real interest rate in the country should ________ dramatically.
A) rise
B) fall
C) segment
D) stabilize
Q3) ________ trade on the ________ equity market and represent a ________ portfolio that may invest in the world markets ________ restricted to a region.
A) Open-end funds, local, fixed, never
B) Closed-end funds, local, fixed, sometimes
C) Open-end funds, foreign, variable, often
D) Closed-end funds, foreign, variable, always
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Page 15
Chapter 14: Country and Political Risk
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Q1) A country's credit spread is another indicator of A) sovereign risk.
B) commercial risk.
C) political risk.
D) credit risk.
Q2) Which one of the following do MNCs use to lower the cost of their investment into a country?
A) foreign bond markets
B) international banks
C) debt-equity swaps
D) long-term forward contracts
Q3) What is the difference between political risk and sovereign risk?
Q4) MNCs can purchase political risk insurance from
A) both public and private sector insurers.
B) public sector insurers only.
C) private sector insurers only.
D) central banks in the country where they are headquartered.
Q5) The discount rate in capital budgeting need not be adjusted for political risk.Agree or disagree and explain why.
Page 16
Q6) How might a government budget deficit lead to inflation?
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Chapter 15: International Capital Budgeting
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Q1) The basic principle of capital budgeting is that
A) all projects with positive adjusted cash flows should be accepted.
B) all projects with adjusted cash flows of zero or greater.
C) only projects with adjusted cash flows should be accepted.
D) only projects financed entirely with equity be accepted.
Q2) With respect to currency measurement,what is the rule when discounting cash flows?
A) The revenues and expenses must be measured as they occur rather than on an incremental basis.
B) There is no need to incorporate the risk premium of that the firm's stockholders would demand in the discount rate.
C) Revenues and expenses should be measured on a pre-tax cash flow basis.
D) All cash flows should be measured in the same currency.
Q3) ________ is the amount of inventory and cash that the firm must have on hand to run its business.
A) Capital expenditure
B) Free cash flow
C) Net working capital
D) Incremental cash flow
Q4) Based on their computation what is the difference between EBIT and NOPLAT?
Page 17
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) What is the name of the approach that discounts the after-tax free cash flows to stockholders at the required rate of return on the equity to derive the value of a project?
A) weighted average cost of capital
B) flow-to-equity
C) adjusted net present value
D) unlevered cash flow
Q2) The managers of Apex International accepted a high-variance,low-value project rather than a low-variance,high-value project.When this occurs,mangers are said to have engaged in ________.
A) shifting value from shareholders to bondholders
B) asset substitution
C) export cannibalization
D) underinvestment
Q3) During periods of financial distress,a firm's managers are ________ to invest in risky projects.
A) less likely
B) least likely
C) more likely
D) most likely
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) Accountants treat many hedges as ________.
A) accrued expenses
B) deferred income
C) near liquid assets
D) off-balance sheet items
Q2) Hedging reduces the amount of ________ in earnings data that is not due to actions of the managers.
A) information
B) certainty
C) "noise"
D) investor interest
Q3) ________ are typically larger in the forward market than in the spot market for currency.
A) Contract sizes
B) Bank fees
C) The bid-ask spreads
D) Employee costs
Q4) Why did Miller and Modigliani claim that hedging exchange rate risk was irrelevant to the value of the firm?
Q5) What are the gains from hedging foreign exchange risk?
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Chapter 18: Financing International Trade
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Q1) Firms that do a substantial amount of foreign trade would most often be interested to purchase a marine insurance policy that is ________.
A) written with minimum payments
B) based on each transaction
C) open or floating
D) closed
Q2) Which one of the following methods of payments is most straightforward and one that is the least risky for the exporter?
A) documents against payment
B) time draft
C) documentary collection
D) cash in advance
Q3) What is the name of the company that purchases the accounts receivable of other firms?
A) shipping company
B) common carrier
C) export factor
D) insurance carrier
Q4) What is the purpose of marine insurance?
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Chapter 19: Managing Net Working Capital
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Q1) What is the term that refers to a firm's stock of cash,marketable securities,accounts receivable,and inventories?
A) working capital
B) cash
C) marketable securities
D) accounts receivable
Q2) What are the constraints facing international cash management from purely domestic cash management?
Q3) One technique a multinational may use to avoid the blocked fund strategy of a foreign nation is for the parent to lend funds to the affiliate.The loan is known as a ________ loan.
A) parallel
B) back-to-back
C) fronting
D) transfer pricing
Q4) Why is stockpiling inventories when faced with the threat of devaluation an insufficient reason to operate the firm?
Q5) What are the determinants of leading payments between related international affiliates?
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Chapter 20: Foreign Currency Futures and Options
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Q1) Why is a currency put or call not profitable to exercise when it is "at the money"?
A) because the spot equals the price but the premium is not recovered if it is exercised resulting in a loss
B) When an option is "at the money," the Exchange will charge a higher fee.
C) When it is "at the money," the Exchange shuts down trading of the option contract.
D) The Exchange will use mark to market accounting to record a loss.
Q2) An option that can be exercised only at maturity is known as a(n)________.
A) American option
B) European option
C) currency warrant
D) call option
Q3) The ________ is the primary location in the United States to trade currency options.
A) Philadelphia Stock Exchange
B) Chicago Board of Trade
C) Chicago Mercantile Exchange
D) New York Stock Exchange
Q4) What effects does "marking to market" have on futures contracts?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) When a situation exists in which two corporations have headquarters in two different countries and each makes a loan of equivalent value to the subsidiary of the other company that operates in its country,we say ________ exists.
A) a lagging accounts receivable payment
B) a parallel loan
C) the right of offset
D) a back-to-back loan
Q2) The nature of swap contracts is usually based on the best practices suggested by the ________,
A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) International Swap and Derivatives Association
D) Securities Exchange Commission
Q3) The theoretical principal underlying the swap is termed the A) basis amount.
B) swap differential.
C) notional principal.
D) arbitrage principal.
Q4) Describe how a back-to-back loan is used.
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