International Financial Management
Pre-Test Questions
Course Introduction
International Financial Management explores the principles and practices involved in managing financial operations within a global context. The course examines topics such as foreign exchange markets, international financial instruments, risk management strategies, cross-border investment decisions, and multinational capital budgeting. Students will gain an understanding of how exchange rate fluctuations, international monetary systems, and global financial regulations impact the financial decision-making processes of multinational corporations. Through case studies and real-world examples, the course prepares students to address the challenges and opportunities of finance in an increasingly interconnected world economy.
Recommended Textbook
Multinational Business Finance 14th Edition by
David K. Eiteman
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18 Chapters
1239 Verified Questions
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Page 2
Chapter 1: Multinational Financial Management: Opportunities and Challenges
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Sample Questions
Q1) It would be safe to make the statement that modern telecommunications now take business activities to labor rather than moving labor to the places of business.
A)True
B)False
Answer: True
Q2) Multinational enterprises (MNEs)are firms,both for profit companies and not-for-profit organizations,that have operations in more than one country,and conduct their business through foreign subsidiaries,branches,or joint ventures with host country firms.
A)True
B)False Answer: True
Q3) The key factor attracting both depositors and borrowers to the Eurocurrency loan market is the narrow interest rate spread within that market.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The International Monetary System
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Sample Questions
Q1) China today is a clear example of a nation that has chosen the following policies
EXCEPT:
A) control and manage the value of its currency
B) conduct an independent monetary policy
C) full financial integration in an attempt to stimulate its domestic economy
D) restrict the flow of capital into and out of the country
Answer: C
Q2) By and large,high capital mobility is forcing emerging market nations to choose between the two extremes of a free floating exchange rate or a hard peg regime.
A)True
B)False
Answer: True
Q3) Based on the premise that,other things equal,countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade.
A)True
B)False
Answer: False
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4
Chapter 3: The Balance of Payments
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Sample Questions
Q1) Which of the following is NOT a part of the Current Account of BOP?
A) net export/import of goods
B) balance of trade
C) net portfolio investment
D) net export/import of services
Answer: C
Q2) Imports have the potential to lower a country's inflation rate.In particular,imports of HIGHER-priced goods and services place a limit on what domestic competitors charge for comparable goods and services.
A)True
B)False
Answer: False
Q3) Expenditures by U.S.students abroad and foreign students pursuing studies in the United States would be considered a services trade and part of the U.S.current account.
A)True
B)False
Answer: True
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Chapter 4: Financial Goals and Corporate Governance
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Sample Questions
Q1) Define patient and impatient capitalism and discuss how each may lead to different decision-making in the shareholder wealth maximization model.
Q2) When discussing the structure of corporate governance,the authors distinguish between internal and external factors.________ is an example of an internal factor,and ________ is an example of an external factor.
A) Equity markets; executive management
B) Debt markets; board of directors
C) Executive management; auditors
D) Auditors; regulators
Q3) In recent years the trend has been for markets to increasing focus on the shareholder wealth form of wealth maximization.
A)True
B)False
Q4) Which of the following is NOT a source of new stock exchange listing additions?
A) initial public offerings
B) movements of share listings from one exchange to another
C) spinouts from larger firms
D) all of the above are sources
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and "selling dollars forward for euros."
A)True
B)False
Q2) The most commonly quoted currency exchange is that between the U.S.dollar and the European euro.For example,a quotation of EUR/USD 1.2174.The euro is the base currency and the dollar the price currency.
A)True
B)False
Q3) 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?
Q4) The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish.List and explain three functions of the foreign exchange market.
Q5) Define spot,forward,and swap transactions in the foreign exchange market and give an example of how each could be used.
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) Assume a nominal interest rate on one-year U.S.Treasury Bills of 2.60% and a real rate of interest of 1.00%.Using the Fisher Effect Equation,what is the approximate expected rate of inflation in the U.S.over the next year?
A) 2.10%
B) 2.05%
C) 1.60%
D) 1.00%
Q2) Assume the current U.S.dollar-yen spot rate is 90 ¥/$.Further,the current nominal 180-day rate of return in Japan is 1% and 2% in the United States.What is the approximate forward exchange rate for 180 days?
A) ¥89.12/$
B) ¥89.55/$
C) ¥90.89/$
D) ¥90.45/$
Q3) If exchange markets were efficient,the deviation of the actual future quote and today's forward rate will be zero.
A)True
B)False
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8
Chapter 7: Foreign Currency Derivatives: Futures and Options
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Sample Questions
Q1) For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new optiom premium would be:
A) $0.036/£.
B) $0.037/£.
C) $0.004/£.
D) $1.54/£.
Q2) Foreign currency options are available both over-the-counter and on organized exchanges.
A)True
B)False
Q3) For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,after an increase in the U.S.dollar rate from 8% to 9% - the new ATM optiom premium would be:
A) $0.037/£.
B) $1.55/£.
C) $0.036/£.
D) $0.035/£.
Q4) List and explain three "Greek" elements and impacts on a call option premium.
Page 9
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Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) The real exposure of an interest or currency swap is not the total notional principal,but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.
A)True
B)False
Q2) How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?
Q3) Which of the following would be considered an example of a currency swap?
A) exchanging a dollar interest obligation for a British pound obligation
B) exchanging a eurodollar interest obligation for a dollar obligation
C) exchanging a eurodollar interest obligation for a British pound obligation
D) All of the above are examples of a currency swap.
Q4) A basis point is one-tenth of one percent.
A)True
B)False
Q5) Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.
A)True
B)False
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Chapter 9: Foreign Exchange Rate Determination
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Sample Questions
Q1) As economic conditions continued to deteriorate in Argentina by the end of 2001,banks suffered increasing runs.The government,fearing that the increasing financial drain on banks would cause their collapse,closed the banks for weeks.
A)True
B)False
Q2) Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
A) flows; stocks
B) stocks; flows
C) import; export
D) export; import
Q3) The single most important element of technical analysis is that future exchange rates are based on the current exchange rate.
A)True
B)False
Q4) The asset market approach to forecasting is not applicable to emerging markets.
A)True
B)False
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Chapter 10: Transaction Exposure
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Sample Questions
Q1) A hedge constructed using puts foreign currency options would be symmetric.
A)True
B)False
Q2) A firm's risk tolerance is a combination of management's philosophy toward transaction exposure and the specific goals of treasury activities.
A)True
B)False
Q3) A forward hedge involves a put or call option contract and a source of funds to fulfill that contract.
A)True
B)False
Q4) Many MNEs have established rigid transaction exposure risk management policies which mandate proportional hedging (a percentage of existing transaction exposures).Explain the pros and cons of proportional hedging.
Q5) The commonly used 100% forward contract cover is a symmetric hedge. A)True
B)False
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Page 12
Chapter 11: Translation Exposure
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Sample Questions
Q1) Gains or losses caused by translation adjustments when using the current rate method are reported separately on the:
A) consolidated statement of cash flow.
B) consolidated income statement.
C) consolidated balance sheet.
D) none of the above
Q2) According to your authors,the main purpose of translation is:
A) to prepare consolidated financial statements.
B) to help management assess the performance of foreign subsidiaries.
C) to act as an interpreter for managers without foreign language skills.
D) none of the above
Q3) The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.
A) current rate; temporal
B) temporal; proper timing
C) current rate; future rate
D) none of the above
Q4) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
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Chapter 12: Operating Exposure
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Sample Questions
Q1) A British firm has a subsidiary in the U.S.,and a U.S.firm,known to the British firm,has a subsidiary in Britain.Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows.The following are techniques to consider:
a)matching currency cash flows
b)risk-sharing agreements
c)back-to-back or parallel loans
Q2) The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand.
A)True
B)False
Q3) Another name for operating exposure is ________ exposure. A) economic B) competitive
C) strategic D) all of the above
Q4) The higher the price elasticity of demand,the higher the degree of pass-through.
A)True
B)False
Page 14
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Chapter 13: The Global Cost and Availability of Capital
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Sample Questions
Q1) Refer to Instruction 13.1.At the end of the year the investor sells his stock that now has an average price per share of 57.What is the investor's average rate of return before converting the stock back into dollars?
A) 5.0%
B) -3.0%
C) -5.0%
D) 3.0%
Q2) Firms acquire debt in either the form of loans from commercial banks,or by selling new common stock.
A)True
B)False
Q3) The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.
A)True
B)False
Q4) Most observers believe that for better or for worse,we have achieved a global market for securities.Discuss the major changes in the international markets of securities: during the 1980s,during the 1990s and the current conditions.
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Chapter 14: Raising Equity and Debt Globally
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Sample Questions
Q1) Which of the following is NOT an advantage of ADRs to U.S.shareholders?
A) Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B) In the event of the death of the shareholder, the estate does not go through a foreign court.
C) Settlement for trading is generally faster in the United States.
D) All of the above are advantages of ADRs.
Q2) Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.
A) point; 50%
B) point; 25%
C) range; 30%-60%
D) range; 10%-40%
Q3) For most firms,the cost of capital decreases to a low point as the firm ________ debt financing.At some point beyond this optimal level,the cost of capital increases as the amount of debt ________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
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Page 16
Chapter 15: Multinational Tax Management
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Sample Questions
Q1) Tax treaties generally have the effect of increasing the withholding taxes between the countries that are negotiating the treaties.
A)True
B)False
Q2) The U.S.Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income.In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making,thus establishing a "guilty until proved innocent" tax approach.
A)True
B)False
Q3) Refer to Instruction 15.1.If the U.S.treated the taxes paid on income earned in the host country as a tax-credit,then Green Valley's total U.S.corporate tax on the foreign earnings would be:
A) $51,250.
B) $35,000.
C) $26,250.
D) $10,000.
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Chapter 16: International Trade Finance
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Sample Questions
Q1) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?
Q2) A time draft is payable on presentation to the drawee; the drawee must pay at once or dishonor the draft.A sight draft,allows a delay in payment.
A)True
B)False
Q3) Because of the risks involved in international trade,most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.
A)True
B)False
Q4) A typical forfaiting transaction involves the following parties EXCEPT:
A) importer
B) exporter
C) carrier
D) importer's Bank
Q5) Explain what a letter of credit (L/C)is,who the principle parties are,what the principle advantage is,and how the L/C facilitates international trade.
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Chapter 17: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) Small- and medium-size firms often attract foreign investors and achieve a global cost of capital.
A)True
B)False
Q2) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.
Q3) The authors were unable to identify in lesser developed countries specific firms that are nearing the status of global MNE.
A)True
B)False
Q4) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate
Q5) Define protectionism and identify the industries that are typically protected.Explain the "infant industry" argument for protectionism.
Q6) What is meant by the term "governance risk"? What is the most important type of governance risk?
Page 19
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Sample Questions
Q1) For purposes of international capital budgeting,it is NOT important to distinguish between parent and total project cash flows.
A)True
B)False
Q2) The traditional financial analysis applied to foreign or domestic projects,to determine the project's value to the firm is called:
A) cost of capital analysis.
B) capital budgeting.
C) capital structure analysis.
D) agency theory.
Q3) A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.
A)True
B)False
Q4) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
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