International Finance
Final Test Solutions
Course Introduction
International Finance explores the financial systems, markets, and instruments that facilitate the movement of capital across borders. The course examines topics such as foreign exchange markets, international monetary systems, balance of payments, exchange rate determination, risk management, and international investment strategies. Students will analyze the effects of exchange rates on international trade and investment, assess the impact of global financial crises, and evaluate the role of multinational corporations in the global economy. Emphasis is placed on practical approaches to managing financial risk and making informed financial decisions in an increasingly interconnected world.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) Most governments at least try to make it difficult for people to cross their borders illegally.This barrier to the free movement of labor is an example of A)information asymmetry.
B)excessive transactions costs.
C)racial discrimination.
D)a market imperfection.
Answer: D
Q2) In David Ricardo's theory of comparative advantage,
A)international trade is a zero-sum game in which one trading partner's gain comes at the expense of another's loss.
B)liberalization of international trade will enhance the welfare of the world's citizens.
C)is a short-run argument, not a long-run argument.
D)has been superseded by the now-orthodox view of mercantilism.
Answer: B
Q3) Is Northern Ireland better off when it trades with Southern Ireland?
A)True
B)False
Answer: True
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3
Chapter 2: International Monetary System
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Q1) Which factors are related to the collapse of the Argentine currency board system and ensuing economic crisis?
A)The lack of fiscal discipline on the part of the Argentine government
B)Labor market inflexibility
C)Contagion from the financial crises in Russia and Brazil
D)All of the above
Answer: D
Q2) When money can move freely across borders,policy makers must choose between
A)exchange-rate stability and an economic growth.
B)exchange-rate stability and inflation.
C)exchange-rate stability and an independent monetary policy.
D)exchange-rate stability and capital controls.
Answer: C
Q3) The Bretton Woods system ended in A)1945.
B)1973.
C)1981.
D)2001.
Answer: B
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Page 4
Chapter 3: Balance of Payments
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Q1) Factor income
A)consists largely of interest, dividends, and other income on foreign investments.
B)is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.
C)is generally a very minor part of national income accounting, smaller than the statistical discrepancy.
D)none of the above
Answer: A
Q2) Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation?
A)The current account
B)The capital account
C)The statistical discrepancies
D)The official settlement balance
Answer: D
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5
Chapter 4: Corporate Governance Around the World
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Q1) When designing an incentive contract,
A)it is important for the board of directors to set up an independent compensation committee that can carefully design the contract and diligently monitor manager's actions.
B)senior executives can be trusted to not abuse incentive contracts by artificially manipulating accounting numbers since the auditors should look in to that.
C)the presence of any incentive is enough, whether it is accounting based or stock-price based.
D)the board of directors should always give the managers a "heads I win, tails you lose" type of option.
Q2) In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities,
A)managers are less likely to waste funds in unprofitable projects.
B)managers are more likely to waste funds in unprofitable projects.
Q3) In countries with concentrated ownership
A)hostile takeovers are quite rare.
B)hostile takeovers are quite common.
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Chapter 5: The Market for Foreign Exchange
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Q1) At the wholesale level
A)most trading takes place OTC between individuals on the floor of the exchange.
B)most trading takes place over the phone.
C)most trading flows over Reuters and EBS platforms.
D)most trading flows through specialized "broking" firms.
Q2) What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.
A) 0.5386/CHF
B) 0.5389/CHF
C) 0.5463/CHF
D) 0.5466/CHF
Q3) Suppose that the current exchange rate is 1.00 = $1.60.The indirect quote,from the U.S.perspective is
A) 1.00 = $1.60.
B) 0.6250 = $1.00.
C) 1.60 = $1.00.
D)None of the above
Q4) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
Q5) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?
A)One has to forecast a set of independent variables to forecast the exchange rates.Forecasting the former will certainly be subject to errors and may not be necessarily easier than forecasting the latter.
B)The parameter values, that is the \(\alpha\)'s and \(\beta\)'s, that are estimated using historical data may change over time because of changes in government policies and/or the underlying structure of the economy.Either difficulty can diminish the accuracy of forecasts even if the model is correct.
C)The model itself can be wrong.
D)All of the above
Q2) Generating exchange rate forecasts with the fundamental approach involves
A)looking at charts of the exchange rate and extrapolating the patterns into the future
B)estimation of a structural model
C)substituting the estimated values of the independent variables into the estimated structural model to generate the forecast
D)both b and c
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Page 8
Chapter 7: Futures and Options on Foreign Exchange
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Q1) Find the input d<sub>1</sub> of the Black-Scholes price of a six-month call option on Japanese yen.The strike price is $1 = ¥100.The volatility is 25 percent per annum; r<sub>$</sub> = 5.5% and r<sub>¥</sub> = 6%.
A)d<sub>1</sub> = 0.074246
B)d<sub>1</sub> = 0.005982
C)d<sub>1</sub> = $0.006137/¥
D)None of the above
Q2) A put option on $15,000 with a strike price of 10,000 is the same thing as a call option on 10,000 with a strike price of $15,000.
A)True
B)False
Q3) The current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is $1.60 = 1.00.Consider a three-month American call option on 62,500 with a strike price of $1.50 = 1.00.If you pay an option premium of $5,000 to buy this call,at what exchange rate will you break-even?
A)$1.58 = 1.00
B)$1.62 = 1.00
C)$1.50 = 1.00
D)$1.68 = 1.00
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Chapter 8: Management of Transaction Exposure
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Q1) A stock market investor would pay attention to
A)anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.
B)unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.
Q2) A call option on £1,000 with a strike price of 1,250 is equivalent to
A)a put option on 1,250 with an exercise price of 1,000.
B)a portfolio of options: a put on 1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.
C)a put option on £1,000 with an exercise price of 1,250.
D)both a and b
Q3) The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is
A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the above
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Chapter 9: Management of Economic Exposure
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Q1) If the domestic currency is strong or expected to become strong,
A)a firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production.
B)a firm should curtail R&D efforts until the exchange rate situation improves.
C)a firm should abandon international sales and focus on domestic market share.
D)the firm should focus on profiting in the currency futures market based on its forecasts.
Q2) The "exposure" (i.e.the regression coefficient beta)is: Hint: Calculate the expression \(\frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }\)
A)7,500
B)2,5000
C)-2,500
D)none of the above
Q3) Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.
Q4) Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Q5) Estimate your exposure (b)to the exchange risk.
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Chapter 10: Management of Translation Exposure
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Q1) A highly inflationary economy is defined in FASB 52 as
A)one that has cumulative inflation of approximately 100 percent or more over a 3-year period.
B)one that has current inflation of approximately 40 percent per year.
C)one that has going-forward expected inflation of approximately 40 percent per year.
D)none of the above
Q2) If a foreign entity is only a shell company for carrying accounts that could be carried on the parent's books,
A)the functional currency would generally be the parent's currency.
B)the functional currency would generally be the local currency.
C)there is no reason to hedge transaction exposure.
D)none of the above
Q3) The "reporting currency" is defined in FASB 52 as
A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)both a and c
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Page 12
Chapter 11: International Banking and Money Market
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Q1) A correspondent bank relationship is established when
A)two banks maintain deposits with one another.
B)two banks write to each other about the credit conditions of their countries.
C)a group of banks form a syndicate to spread out the risk and cost of a large bond offering.
D)all of the above
Q2) The LIBOR rate for euro
A)is EURIBOR.
B)is a government set rate.
C)is the rate at which Interbank deposits of euro are offered by one prime bank to another in the euro zone.
D)both a and c
Q3) Edge Act banks are not prohibited from owning equity in business corporations,unlike domestic commercial banks.
A)True
B)False
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Chapter 12: International Bond Market
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Q1) In contrast to many domestic bonds,which make _________ coupon payments,coupon interest on Eurobonds is typically paid _________
A)semiannual, annually.
B)annual, semiannually.
C)quarterly, semiannually.
D)quarterly, annually.
Q2) With regard to dual-currency bonds versus comparable straight fixed-rate bonds,
A)dual currency bonds usually trade at a premium to reflect the value of the forward contract implicit in their repayment schedule.
B)the interest on dual-currency bonds is usually lower than on comparable straight fixed-rate debt.
C)the interest on dual-currency bonds is usually higher than on comparable straight fixed-rate debt.
D)none of the above
Q3) With regard to clearing procedures for bond transactions
A)it is a system for transferring ownership of bonds.
B)it is a system for ensuring payment from buyers to sellers.
C)most Eurobond trades clear through two major clearing systems.
D)all of the above
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Page 14
Chapter 13: International Equity Markets
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Q1) ADRs
A)are American Depository Receipts.
B)denominated in U.S.dollars that trade on a U.S.stock exchange.
C)are depository receipts for foreign stocks held by the U.S.depository's custodian.
D)all of the above
Q2) An all-or-none order is a limit order either to buy or to sell a security in which the broker is directed to attempt to fill the entire amount of the order or none of it.An all-or-none order differs from a fill-or-kill order in that
A)with an all-or-none order immediate execution is not required.
B)with an all-or-none order immediate execution is required.
C)with an all-or-none order oversubscription is allowed-filling the order for more shares.
D)none of the above
Q3) Which investment is likely to be the least liquid?
A)A share of publicly traded company trading on the NYSE.
B)A bond issued by a Fortune 500 company.
C)A house in a nice part of town.
D)a and b are equally liquid
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Chapter 14: Interest Rate and Currency Swaps
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Q1) An interest-only single currency interest rate swap
A)is also known as a plain vanilla swap.
B)is also known as an interest rate swap.
C)is about as simple as swaps can get.
D)all of the above
Q2) FOR YOUR SWAP (the one you have shown above)how would the swap bank quote the swap against prime? (Hint: they are quoting a bid-ask spread against "flat" prime.)
Q3) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q4) Suppose that the swap that you proposed in question 2 is now 4 years old (i.e.there is exactly one year to go on the swap).The fourth payment has already been made.If the spot exchange rate prevailing in year 4 is $1.8778 = 1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = 1,what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:
Q5) What would be the interest rate?
Q6) Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan.
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Chapter 15: International Portfolio Investment
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Q1) With regard to the past price performance of U.S.-based closed end country funds,
A)most CECFs behave more like U.S.securities than their corresponding NAVs.
B)most CECFs have track records nearly identical to their currency returns.
C)most CECFs have stock betas of around zero when measured against the S&P 500.
D)none of the above
Q2) Assume that you have invested $100,000 in British equities.When purchased the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively.At selling time,one year after purchase,they were £45 and £0.60/$1.00.If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00,the dollar rate of return would be:
A)-27.27%
B)-17.42%
C)28.00%
D)-9.09%
Q3) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock using 50% margin.One year after investment,the stock pays a £1 dividend,and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound.The interest on the margin loan is 1% per year.The margin loan was denominated in pounds.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) According to the internalization theory of FDI
A)firms that have intangible assets with a public good property tend to invest directly in foreign countries.
B)property rights in intangible assets are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available.
C)both b and a
D)none of the above
Q2) In evaluating political risk,experts focus their attention on a set of key factors such as A)integration of the host country into the world political/economic system.
B)the host country's ethnic and religious stability.
C)the host country's regional security, and key economic indicators.
D)all of the above
Q3) The Ford Motor Company recently acquired Mazda,a Japanese auto maker,and Jaguar,a British auto maker.
A)This is an example of cross-border M&A.
B)This was a Greenfield investment.
C)both a and b
D)none of the above
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Compute the debt-to-equity ratio for a firm that has a debt-to-value ratio of 60%.
A)1/3
B)2/5
C)3/2
D)2/3
E)None of the above
Q2) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 ½.
A)3/4
B)7/9
C)4/5
D)9/11
E)5/6
Q3) A firm may cross-list its share to
A)establish a broader investor base for its stock.
B)establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets.
C)expose the firm's name to a broader investor and consumer groups.
D)all of the above
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Chapter 18: International Capital Budgeting
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Q1) Using the APV method,what is the value of this project to an all-equity firm?
A)-$46,502,288.10
B)$12,494,643.75
C)$36,580,767.55
D)-$67,163,445.12
E)$59,459,301.03 The firm will partially finance the project with an 8% interest-only 4-year loan.
Q2) What is the NPV of the project using the APV methodology?
A)$49,613.03
B)$198,469
C)$102,727.55
D)$149,580.12
E)None of the above
Q3) What is the unlevered after-tax incremental cash flow for year 2?
A)-$4,610
B)$102,300
C)$202,300
D)$255,000
E)None of the above
Q4) What is the euro-denominated IRR?
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Many of the skills necessary for effective cash management are the same regardless of whether the firm has only domestic operations or if it operates internationally.
A)True
B)False
Q2) In reference to establishing "transfer prices" between the affiliates of an MNC,which of the following relates to the "resale" price approach?
A)Comparable uncontrolled price between unrelated firms.
B)The price at which the good is resold by the distribution affiliate is reduced by an amount to cover overhead costs and a reasonable profit.
C)Assumes that the manufacturing cost is readily available.
D)Is based on financial and economic models and econometric techniques.
Q3) A centralized cash pool assists in reducing the problem of mislocated funds and in funds mobilization.
A)True
B)False
Q4) Using your results to the last question,use bilateral netting to simplify.
Q5) Using your results to the last question,use bilateral netting to simplify.
Q6) Fill out the following figure with the initial situation shown in the table.
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Chapter 20: International Trade Finance
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Q1) When a bank purchases at a discount from an importer a series of promissory notes in favor of an exporter,this is called
A)accounts receivable financing.
B)asset backed commercial paper.
C)discounting.
D)forfeiting.
Q2) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q3) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q4) Assume the time from acceptance to maturity on a $2,000,000 banker's acceptance is 90 days.Further assume that the importing bank's acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 6.0 percent.Calculate the amount the exporter will receive if he discounts the B/A with the importer's bank.
A)$1,993,750
B)$1,999,375
C)$1,963,750
D)$1,009,375
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Page 22
Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) The term "capital-import neutrality" refers to
A)the criterion that an ideal tax should be effective in raising revenue for the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)the fact that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)the criterion that the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same regardless in which country the MNC is incorporated and the same as that placed on domestic firms.
D)underlying principle that all similarly situated taxpayers should participate in the cost of operating the government according to the same rules.
Q2) The current marginal U.S.income tax rate is positioned
A)pretty well in the middle of the rates assessed by the majority of other countries.
B)towards the upper end of the rates assessed by the majority of other countries.
C)towards the lower end of the rates assessed by the majority of other countries.
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Page 23