Financial Risk Management Exam Materials
Course Introduction
Financial Risk Management introduces the principles and tools necessary to identify, assess, and mitigate financial risks faced by organizations and individuals. The course covers various types of financial risks, including market, credit, operational, and liquidity risk, and examines methodologies such as value-at-risk, stress testing, and scenario analysis. Students will analyze the roles of derivatives, insurance, and hedging strategies in managing risk, and consider the regulatory frameworks and ethical considerations that impact risk management practices. Through case studies and practical applications, students gain the skills needed to develop and implement effective risk management strategies in dynamic financial environments.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
1676 Verified Questions
1676 Flashcards
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Chapter 1: Multinational Financial Management: An Overview
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) Which of the following is not mentioned in the text as a theory of international business?
A) Theory of Comparative Advantage
B) Imperfect Markets Theory
C) Product Cycle Theory
D) Globalization of Business Theory
E) All of the above are mentioned in the text as theories of international business
Answer: D
Q2) A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.
A)True
B)False
Answer: True
Q3) ____ are most commonly classified as a direct foreign investment.
A) Foreign acquisitions
B) Purchases of international stocks
C) Licensing agreements
D) Exporting transactions
Answer: A
Page 3
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.
A)True
B)False
Answer: True
Q2) The ____ is the difference between exports and imports.
A) balance of trade
B) balance on goods and services
C) balance of payments
D) current account
E) capital account
Answer: A
Q3) Exporting of products by one country to other countries at prices below cost is called elasticity.
A)True
B)False
Answer: False
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4
Chapter 3: International Financial Markets
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102 Flashcards
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Sample Questions
Q1) The ask quote is the price for which a bank offers to sell a currency.
A)True
B)False
Answer: True
Q2) A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.
A)True
B)False
Answer: False
Q3) The term "eurobor" is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth.
A)True
B)False Answer: False
Q4) The existence of imperfect markets has prevented the internationalization of financial markets.
A)True
B)False Answer: False
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Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:
A) an increased demand for British pounds.
B) a decrease in the demand for British pounds.
C) an increase in the supply of British pounds for sale.
D) a decrease in the supply of British pounds for sale.
Q2) Which of the following interactions will likely have the least effect on the dollar's value? Assume everything else is held constant.
A) A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates
B) A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates
C) An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates
D) An increase in Singapore's inflation accompanied by an increase in real U.S. interest rates
E) An increase in Singapore's interest rates accompanied by an increase in U.S. inflation.
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
A)True
B)False
Q2) If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.
A) increase slightly B) decrease substantially C) increase substantially D) stay the same
Q3) A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
A)True
B)False
Q4) An advantage of a short straddle is that it provides the option writer with income from two separate sources.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.
A) Latin American
B) European
C) Asian
D) North American
Q2) A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.
A) upward; upward
B) downward; upward
C) upward; downward
D) downward; downward
Q3) The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.
A)True
B)False
Q4) Dollarization refers to the replacement of local currency with U.S. dollars.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Which of the following is an example of triangular arbitrage initiation?
A) Buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.
B) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.
C) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.
D) Converting funds to a foreign currency and investing the funds overseas.
Q2) 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
Q3) The foreign exchange market is an over-the-counter market.
A)True
B)False
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9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.
A)True
B)False
Q2) The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
A)True
B)False
Q3) Given a home country and a foreign country, purchasing power parity suggests that: A) the inflation rates of both countries will be the same.
B) the nominal interest rates of both countries will be the same.
C) A and B
D) none of the above
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10
Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?
A) fundamental forecasting.
B) market-based forecasting.
C) technical forecasting.
D) mixed forecasting.
Q2) Market-based forecasting involves the use of historical exchange rate data to predict future values.
A)True
B)False
Q3) If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
A) underestimated the future exchange rates over time.
B) overestimated the future exchange rates over time.
C) forecasted future exchange rates accurately.
D) forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.
A) weak; somewhat stable
B) weak; favorably affected
C) weak; adversely affected
D) none of the above
Q2) Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.
A)True
B)False
Q3) One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.
A)True
B)False
Q4) Currency correlations are generally negative.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
A)True
B)False
Q2) When the real cost of hedging is positive, this implies that hedging was more favorable than not hedging.
A)True
B)False
Q3) The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
A) index
B) futures
C) forward
D) money market
E) currency option
Q4) Most MNCs can completely hedge all of their transactions.
A)True
B)False
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) ____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
A) Translation
B) Transaction
C) Economic
D) None of the above
Q2) Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from imports from Cyprus. However, Thornton's revenues are denominated solely in U.S. dollars. Which of the following is probably not true?
A) Thornton would benefit from a depreciation of the Cyprus pound.
B) Thornton has at least some transaction exposure.
C) Thornton has at least some economic exposure.
D) Thornton has at least some translation exposure.
E) All of the above are true.
Q3) Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) To exploit monopolistic advantages, an MNC should:
A) acquire a competitor that has controlled its local market.
B) establish a subsidiary or acquire a competitor in a new market.
C) establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
D) establish subsidiaries in markets where competitors are unable to produce the identical product.
Q2) When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.
A) overvalued; high
B) overvalued; low
C) undervalued; high
D) undervalued; low
Q3) Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.
A)True
B)False
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:
A) the taxes are the same as in the U.S.
B) there are no blocked fund restrictions.
C) the currency of the host country is expected to depreciate consistently.
D) none of the above; a discrepancy is not possible.
Q2) An international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Q3) When evaluating international project cash flows, which of the following factors is relevant?
A) future inflation.
B) blocked funds.
C) exchange rates.
D) all of the above
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Page 16
Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
A)True
B)False
Q2) Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.
A)True
B)False
Q3) Refer to Exhibit 15-1. The Malaysian target's value based on its stock price is $____ million.
A) 1.4
B) 1,673.9
C) 111.5
D) 88.6
E) none of the above
Q4) The sale of a subsidiary by an MNC is referred to as a divestiture.
A)True
B)False
Page 17
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) The ____ involves the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.
A) checklist approach
B) discriminant analysis
C) regression analysis
D) Delphi technique
Q2) Country risk can affect an MNC's cash flows but cannot affect its cost of capital.
A)True
B)False
Q3) To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor.
A)True
B)False
Q4) If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant.
A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany:
U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%
What is Brama's after-tax cost of dollar-denominated debt?
A) 7.0%.
B) 4.9%.
C) 8.0%.
D) 5.6%.
Q2) When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.
A)True
B)False
Page 19
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap between two parties.
A) ultraparty
B) broker
C) counterparty
D) none of the above
Q2) A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:
A) issuing Swiss franc-denominated bonds.
B) purchasing Swiss franc-denominated bonds.
C) purchasing U.S. dollar-denominated bonds.
D) issuing U.S. dollar-denominated bonds.
Q3) 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
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Chapter 19: Financing International Trade
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Sample Questions
Q1) Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
Q2) When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.
A)True
B)False
Q3) The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
A)True
B)False
Q4) The payment method that affords the supplier the greatest degree of protection is the prepayment method.
A)True
B)False
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Chapter 20: Short-Term Financing
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Sample Questions
Q1) Kushter Inc. would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter's effective financing rate next year?
A) 1.92%
B) 2.00%
C) 6.08%
D) none of the above
Q2) If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency.
A)True
B)False
Q3) Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is: A)8%.
B)14.48%.
C)2%.
D)1.52%.
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Chapter 21: International Cash Management
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Sample Questions
Q1) 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.
Q2) A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.
A)True
B)False
Q3) 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
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