International Financial Management
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Course Introduction
International Financial Management explores the complexities of managing finance in a global business environment. The course covers key topics such as foreign exchange markets, international financial markets and institutions, exchange rate determination, risk management techniques, and the impact of international financial regulations and political risks on corporate strategy. Students will develop an understanding of currency exposure, international investment decisions, global financing strategies, and cross-border capital budgeting, equipping them with analytical tools essential for decision-making in multinational corporations and for navigating the rapidly evolving world of international finance.
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) What economic field of study explores the problems associated with a firm that arise from a separation of ownership and control and devises ways to resolve them?
A) futures and options
B) agency theory
C) foreign direct investment
D) franchising
Answer: B
Q2) Which of the following is NOT a protectionist tendency?
A) tariffs
B) comparative advantage
C) non-tariff barriers
D) quotas
Answer: B
Q3) Why do the anti-globalists see globalization as a threat to the home country?
Answer: Anti-globalists believe that one outcome of globalization is the outsourcing phenomenon which they blame for threatening the home country's work force.
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Chapter 2: The Foreign Exchange Market
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Sample Questions
Q1) Which one of the following is not a characteristic of a liquid market?
A) Market makers stand ready to buy and sell currencies.
B) Foreign exchange dealers make transactions only with dealers.
C) It becomes easy to match buyers and sellers.
D) Transaction costs are low.
Answer: B
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) If you were trading currency in the New York currency market,the exchange rate between two currencies not expressed in U.S.dollars would be known as the ________ quote.
A) direct
B) indirect
C) cross-rate
D) European
Answer: C
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Chapter 3: Forward Markets and Transaction Exchange Risk
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Sample Questions
Q1) When does delivery occur on a 90-day forward contract?
A) in 90 days corresponding to two business days preceding the third Wednesday of the month
B) immediately but the contract is not closed for 90 more days
C) in 90 days corresponding to the calendar date of the spot value date
D) two business days following the spot value date
Answer: C
Q2) What is the statistical interpretation of the expected future spot rate?
Answer: The expected future spot rate is the conditional mean of the probability distribution of future spot rates.The probability distribution describes all of the possible realizations (or ranges of realizations)of the future spot rate and assigns probabilities to those values (or ranges of values).The conditional mean of the probability distribution of future spot rates takes a probability weighted average of those possible realizations (or ranges of realizations).We say that the expectation is conditional because we use all available information at the time when we are describing the probability distribution.
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Chapter 4: The Balance of Payments
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Q1) In order to reduce its current account deficit,the United States must do which of the following?
A) reduce the federal budget deficit
B) raise national product relative to national spending
C) increase savings relative to domestic investment
D) all of the above
Q2) Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991,financed by a five year loan from the US Export Import Bank.There is a one-year grace period on principal and interest payments.The net impact of this sale in 1991 is
A) a $150 million reduction in the U.S. trade deficit.
B) a $150 million reduction in the U.S. capital account surplus.
C) zero change in the U.S. balance of payments in 1991.
D) all of the above.
Q3) During the 1990s the countries of Mexico and Argentina went from economic paupers with huge foreign debts (capital account deficits)to countries posting strong economic growth and welcoming foreign investment.What would you expect these changes to do to their current account balances?
Q4) If a U.S.non-profit makes a large gift to an Israeli agency,how is it handled in the balance of payments?
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Chapter 5: Exchange Rate Systems
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Q1) Identify the most important components of the official international reserves of a central bank?
Q2) For a fixed exchange rate system to work successfully,the government that oversees its operations must be able to make tight budget and monetary policies prevail from the beginning.Agree or disagree and explain why.
Q3) Which account should NOT be included in the asset section of a central bank balance sheet?
A) currency in circulation
B) official international reserves
C) domestic credit
D) government bonds
Q4) The special drawing rights of the IMF and the European currency unit are two examples of ________.
A) currency boards
B) floating exchange rates
C) target zones
D) baskets of currencies
Q5) Why are pegged exchange rates often overvalued and difficult to governments to maintain?
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Chapter 6: Interest Rate Parity
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Q1) It is often said that interest rate parity is satisfied when the differential between the interest rates denominated in two currencies equals the forward premium or discount between the two currencies.Explain why this is an imprecise statement when the interest rates are not continuously compounded.
Q2) Which one of the following is NOT a reason for using hedges such as a synthetic forward?
A) In some currency markets, forward contracts may not be available, but they can be manufactured using a money market hedge.
B) Individual companies are not able to borrow and lend at the interest rates available in the interbank market.
C) When time horizons are long, forward contracts can be expensive as the bid-ask spread widens substantially.
D) It may be unfavorable to consider borrowing and lending to hedge one's currency risk.
Q3) Explain the bid-ask spread in the external currency market?
Q4) Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S.dollars.
Q5) Identify an external currency market and how it operates?
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Page 8
Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Sample Questions
Q1) Multinational corporations most often hedge their transaction exchange rate risk using currency ________.
A) options
B) futures
C) spreads
D) forward contracts
Q2) Regression tests of the unbiasedness hypothesis indicate that it is ________ with real life events.
A) an unbiased indicator of expected future exchange rates
B) very consistent
C) not consistent
D) has a strong correlation to the current account
Q3) When the forward rate is equal to the expected future spot rate,the forward rate is said to be ________ the future spot rate.
A) an information signal for
B) an unbiased predictor of
C) a hedge for
D) in parity with the expected future spot rate
Q4) What is the main determinant of the volatility of forward market returns?
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) A 150% return in Belarus is higher than a 15% dollar return in the U.S.
A) because arbitrage opportunities exist.
B) when the inflation controls are suspended in Belarus.
C) it depends on whether these are nominal or real returns.
D) regardless of nominal or real returns.
Q2) In its absolute version,purchasing power parity states that price levels worldwide should be ________ when expressed in a common currency.
A) equal
B) roughly equal
C) different
D) opportunities for arbitrage
Q3) What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?
Q4) What is the name of the expression that refers to the costs that a firm incurs in changing its prices?
A) fixed costs
B) variable costs
C) cost-base pricing
D) menu costs
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) How would an exporter who always shifts exchange rate risk to the importer by invoicing in the home currency actually threaten future sales?
Q2) ________ profitability refers to the purchasing power of a firm's nominal profits.
A) Real
B) Relative
C) Global D) Inflation-adjusted
Q3) In general,a real depreciation of the domestic currency ________ importers and ________ exporters.
A) hurts, helps B) helps, hurts C) bypasses, helps D) hurts, bypasses
Q4) Why is the pass-through from changes in exchange rates to changes in the prices of products not one-for-one?
Q5) Why does the strategy of pricing-to-market depend on the assumption of market segmentation?
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11
Chapter 10: Exchange Rate Determination and Forecasting
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Q1) Which of the following statistics would NOT be useful to forecast currency exchange rates?
A) the root mean square error
B) mean absolute deviation
C) the Sharpe ratio
D) the covariance with the benchmark currency changes
Q2) The covered interest rate parity,uncovered interest rate parity,and purchasing power parity,together with the Fisher hypothesis are often referred to as the A) determinants of expected nominal exchange rates.
B) determinants of expected nominal interest rates.
C) international parity conditions.
D) international arbitrage conditions.
Q3) Describe three statistics you should obtain from a currency-forecasting service in order to judge the quality of its currency forecasts.
Q4) What technical forecasting method is NOT a component of statistical analysis?
A) chartism
B) filter rules
C) regression analysis
D) nonlinear analysis
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Chapter 11: International Debt Financing
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Sample Questions
Q1) Which one of the following is NOT an external source of corporate funding?
A) bank loan
B) retained earnings
C) debt security
D) equity
Q2) When an MNC issues low interest rate bonds in another country,what is the ultimate cost of the debt?
A) government actions
B) interest rates in the global markets
C) currency movements
D) purchasing power
Q3) ________ is the packaging of assets or obligations such as mortgages or car loans,into securities for sale to third parties.
A) Eurocredits
B) Floating-rate notes
C) Asset securitization
D) Demutualization
Q4) How are the transactions in the global bond market in reality a simultaneous transaction in two separate markets?
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Chapter 12: International Equity Financing
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Q1) ________ trading systems,often found in foreign exchange markets,are good examples of markets in which market makers stand prepared to buy at their bid prices and sell at the ask or offer prices.
A) Order-driven
B) Price-driven
C) Cross-listed
D) Cross-holding
Q2) GDRs are like ADRs,but they can trade across many markets and A) they are always associated with existing companies seeking to increase their shareholder base.
B) they are not associated with companies wanting to tap the equity market for the first time.
C) are primarily interested on raising additional capital.
D) settle in the currency of each market.
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) What is a price-driven trading system?
14
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Chapter 13: International Capital Market Equilibrium
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Q1) In integrated markets,the covariance with the world should determine the expected return on the ________.
A) international market
B) world market
C) domestic market
D) country market
Q2) Most investors' portfolios in different countries have a strong home bias which means they hold a ________ share of domestic assets compared to the ________ market portfolio.
A) proportionately medium, international
B) disproportionately small, world
C) proportionately large, international
D) disproportionately large, world
Q3) The capital asset pricing model was derived with simplified assumptions building on the original mean-variance optimizations analytics developed by ________.
A) Mossin
B) Sharpe
C) Lintner
D) Markowitz
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Page 15
Chapter 14: Country and Political Risk
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Q1) The Baker Plan of 1985 is named for the U.S.________.
A) secretary of state
B) president
C) federal reserve chair
D) treasury secretary
Q2) What are some indicators of country health?
Q3) Brady bonds were issued in 1989 in response to the Brady Plan in which the
A) debt of developing countries was securitized into easily tradable bonds.
B) countries agreed to change their economic policies following guidelines set by the UMF in exchange for new loans to developing countries.
C) repayment of debts from developing countries were severely restricted.
D) debts of developing countries were exchanged in debt-equity swaps.
Q4) The Baker Plan of 1985 is most associated with
A) the 1973 oil crisis.
B) the 1996 Mexican peso crisis.
C) the 2006 Bolivian government's expropriation of gas fields.
D) the 1980 debt crisis.
Q5) The discount rate in capital budgeting need not be adjusted for political risk.Agree or disagree and explain why.
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Chapter 15: International Capital Budgeting
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Q1) Which one of the following is NOT a financial side effect to account for when developing the adjusted net present value of a project?
A) subsidized financing from governments
B) the Federal Reserve Chair announces an interest rate increase
C) the cost of issuing securities
D) the costs of financial distress
Q2) When a firm's management chooses not to pay out dividends from its free cash flow,it develops ________ that may lead to high agency costs.
A) negative net present value
B) additional depreciation
C) no more growth options
D) financial slack
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) What is meant by the cannibalization of an export market?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) With respect to project value,what is meant by the underinvestment problem?
Q2) According to Modigliani and Miller,in the absence of taxes,the presence of ________ cannot change the value of the firm.
A) financial distress
B) labor strife
C) new equity raises
D) debt
Q3) The ________ is the change in a firm's future operating profit divided by its investment.
A) return on investment
B) plowback ratio
C) payout ratio
D) discount rate
Q4) What is the name given to the ratio of investment to gross cash flows?
A) payout ratio
B) retention ratio
C) plowback ratio
D) debt to equity ratio
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Q5) Explain how equity is a residual claimant in the flow-to-equity approach to capital budgeting?
Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) A ________ tax code imposes a larger tax rate on a higher income and a smaller tax rate on lower incomes.
A) convex
B) concave
C) proportional
D) flat-rate
Q2) ________ is the use of derivative securities to take positions in financial markets that offset the underlying sources of risk that arise in a company's normal course of business.
A) Hedging
B) Risk management
C) Asset securitization
D) Option premium
Q3) ________ are financial contracts whose values depend on the values of some underlying asset price.
A) Margin calls
B) Derivative securities
C) Tax codes
D) Tax shields
Q4) Why is hedging considered a cost center and not a profit center?
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Chapter 18: Financing International Trade
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Q1) The Financial Credit Insurance Association offers two basic types of insurance polities to protect exporters against ________ and ________ risks.
A) exchange rate, political
B) commercial, political
C) exchange rate, economic
D) commercial, logistics
Q2) The International Chamber of Commerce provides the following EXCEPT:
A) writing export credit insurance.
B) promoting international trade and investment.
C) setting rules and standards for international trade.
D) arbitration and other forms of dispute resolution.
Q3) The Export-Import Bank of the U.S.is the only independent U.S.government corporation whose sole purpose is to support ________ in their efforts to conduct international trade.
A) U.S. exporters
B) U.S. importers
C) both U.S. exporters and importers
D) potential U.S. importers
Q4) What are the advantages of a documentary credit to an exporter and an importer?
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Chapter 19: Managing Net Working Capital
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Q1) A firm would increase its investment in net working capital in order to produce
A) dividends in the future
B) cash in the future
C) more marketable securities
D) larger inventories
Q2) If the cash a firm invests in net working capital does not earn the weighted average cost of capital,it should be ________.
A) paid instead in returns to the firm's investors
B) held in retained earnings
C) placed in marketable securities
D) held as cash
Q3) Using a centralized cash management system results in a decreased ________ cash demand.
A) transactions
B) long-term
C) precautionary
D) short-term
Q4) What are the constraints facing international cash management from purely domestic cash management?
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Chapter 20: Foreign Currency Futures and Options
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Q1) 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
Q2) The ________ is the minimum amount that must be kept in the futures margin account to guard against severe volatility in the futures contract price.
A) initial margin
B) settle price
C) maintenance margin
D) open interest
Q3) The original or first seller of the option is known as the ________.
A) option broker
B) writer
C) option commission merchant
D) clearing member
Q4) What effects does "marking to market" have on futures contracts?
Q5) What does it mean for an American option to be "in the money"?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ________ from functioning fully.
A) hedging
B) factoring
C) arbitrage
D) forfaiting
Q2) The ________ is the conceptual principal amount that controls the cash flows of an interest rate swap.
A) notional principal
B) all-in cost
C) right of offset
D) yield to call
Q3) The principal amount of the currencies in a currency swap is determined by ________ between the two parties to the swap.
A) the notional principal
B) negotiation
C) the right of offset
D) the yield to call
Q4) Describe how a back-to-back loan is used.
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