International Financial Management
Final Test Solutions
Course Introduction
International Financial Management explores the concepts, tools, and techniques essential for managing financial operations in a global business environment. The course covers topics such as foreign exchange markets, international risk management, cross-border investment decisions, multinational capital budgeting, and financial strategies in multinational corporations. Students will learn how global economic factors, currency fluctuations, and varying regulatory environments impact financial decisions, and will develop the skills necessary to analyze and manage the complexities of international financial transactions. Through case studies and real-world examples, students gain a practical understanding of the strategies used by firms to optimize financial performance and manage risk on a global scale.
Recommended Textbook
International Financial Management 7th Edition by Cheol S. Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) The ascendance of the dollar the dominant global currency reflects several key factors such as
A)the size of the U.S. population.
B)the mature and open capital markets of the U.S. economy.
C)exchange rate stability.
D)all of the above.
Answer: B
Q2) A firm with concentrated ownership
A)may give rise to conflicts of interest between dominant shareholders and small outside shareholders.
B)may enjoy more accounting transparency than firms with diffuse ownership structures.
C)is a partnership, never a corporation.
D)tends to exist overseas but not in the U.S.
Answer: D
Q3) What is the increased amount of goods available in Northern Ireland after trade?
A)400 more bottles of whiskey and 200 more kegs of beer
B)1,000 more bottles of whiskey and 500 more kegs of beer
C)200 more bottles of whiskey and 400 more kegs of beer
Answer: A
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Chapter 2: International Monetary System
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Q1) In the United States, bimetallism was adopted by the Coinage Act of 1792 and remained a legal standard until 1873,
A)when Congress dropped the silver dollar from the list of coins to be minted.
B)when Congress dropped the twenty-dollar gold piece from the list of coins to be minted.
C)when gold from the California gold rush drove silver out of circulation.
D)when gold from the California gold rush drove gold out of circulation.
Answer: A
Q2) The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between
A)national monetary policy autonomy and international economic integration.
B)exchange rate uncertainty and national policy autonomy.
C)Balance of Payments autonomy and inflation.
D)unemployment and inflation.
Answer: A
Q3) In the years leading to the collapse of the Bretton Woods system
A)it became clear that the dollar was undervalued.
B)it became clear that the dollar was overvalued.
Answer: B
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Page 4
Chapter 3: Balance of Payments
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Q1) Regarding the statistical discrepancy in the balance-of-payments accounts
A)there is some evidence that financial transactions may be mainly responsible for the discrepancy.
B)the sum of the balance on the capital account and the statistical discrepancy is very close to the balance of the current account in magnitude.
C)it tends to be positive one year and negative in others, so it's safe to ignore it.
D)a and b
Answer: D
Q2) Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer.
A)Payment by McDonalds will be recorded as a debit.
B)The deposit of the funds by the seller will be recorded as a debit.
C)Payment by McDonalds will be recorded as a credit.
D)The deposit of the funds by the buyer will be credit.
Answer: A
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5
Chapter 4: Corporate Governance Around the World
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Q1) The Cadbury Code of Best Practice
A)is the U.N. equivalent of the Sarbanes-Oxley Act.
B)is voluntary, but firms that fail to comply must explain why they choose not to comply.
C)has the force of law, like the Sarbanes-Oxley Act.
D)none of the above
Q2) In the United States and the United Kingdom, hostile takeovers
A)are illegal.
B)can serve as a drastic corporate governance mechanism of the last resort.
C)reinforce the notion that managers can take their control of the company for granted.
D)require management approval.
Q3) While debt can reduce agency costs between shareholders and management,
A)excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem.
B)with debt financing companies can misuse debt to finance corporate empire building.
C)both a and b
D)none of the above
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Chapter 5: The Market for Foreign Exchange
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Q1) The current exchange rate is 1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys 100,000 from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank
A)Bank A's dollar-denominated account at B will fall by $150,000.
B)
B) Bank B's dollar-denominated account at A will fall by $150,000.
C) Bank A's pound-denominated account at B will fall by 100,000.
D) Bank B's pound-denominated account at A will rise by 100,000.
Q2) Suppose that the current exchange rate is 0.80 = $1.00. The direct quote, from the U.S. perspective is
A) 1.00 = $1.25.
B) 0.80 = $1.00.
C)£1.00 = $1.80.
D)None of the above
Q3) On average, worldwide daily trading of foreign exchange is closest to A)impossible to estimate.
B)$15 billion.
C)$504 billion.
D)$3.21 trillion.
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) If IRP fails to hold
A)pressure from arbitrageurs should bring exchange rates and interest rates back into line.
B)it may fail to hold due to transactions costs.
C)it may be due to government-imposed capital controls.
D)all of the above
Q2) Covered Interest Arbitrage (CIA) activities will result in
A)an unstable international financial markets.
B)restoring equilibrium prices quickly.
C)a disintermediation.
D)no effect on the market.
Q3) The price of a McDonald's Big Mac sandwich
A)is about the same in the 120 countries that McDonalds does business in.
B)varies considerably across the world in dollar terms.
C)supports PPP.
D)none of the above.
Q4) If you had 1,000,000 and traded it for USD at the spot rate, how many USD will you get?
Page 8
Q5) If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
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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> = $0.006137/¥
D)None of the above
Q2) For European currency options written on euro with a strike price in dollars, what of the effect of an increase in r<sub>$</sub> relative to r<sub> </sub>?
A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls, increase the value of puts ceteris paribus
D)Increase the value of calls, decrease the value of puts ceteris paribus
Q3) Which of the following is correct?
A)European options can be exercised early.
B)American options can be exercised early.
C)Asian options can be exercised early.
D)All of the above
Q4) Calculate the current /£ spot exchange rate.
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Chapter 8: Management of Transaction Exposure
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Q1) The current exchange rate is 1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
A)The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B)The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C)The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D)None of the above
Q2) To hedge a foreign currency payable,
A)buy call options on the foreign currency.
B)buy put options on the foreign currency.
C)sell call options on the foreign currency.
D)sell put options on the foreign currency.
Q3) The most direct and popular way of hedging transaction exposure is by
A)exchange-traded futures options.
B)currency forward contracts.
C)foreign currency warrants.
D)borrowing and lending in the domestic and foreign money markets.
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Page 10
Chapter 9: Management of Economic Exposure
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Q1) A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries) can
A)not mitigate the effects of exchange rate changes.
B)lessen the effect of exchange rate changes by sourcing from where input costs are low.
C)focus on selling commodity products with product differentiation.
D)pursue a strategy of increasing its products price elasticity of demand.
Q2) Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate
A)will tend to weaken the competitive position of import-competing U.S. car makers.
B)will tend to strengthen the competitive position of import-competing U.S. car makers.
C)will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers.
D)none of the above
Q3) Estimate your exposure (b) to the exchange risk.
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11
Chapter 10: Management of Translation Exposure
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Q1) The extent to which the value of the firm would be affected by expected changes in the exchange rate is
A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the above
Q2) When exchange rates change
A)the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency.
B)the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency.
C)hedging should be done after the change.
D)none of the above
Q3) FASB 8 is essentially the
A)current/noncurrent method.
B)monetary/nonmonetary method.
C)temporal method.
D)current rate method.
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12
Chapter 11: International Banking and Money Market
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Q1) A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90.
A)The bank pays $3,0084.52 at the end of 3 months
B)The bank pays $3,0084.52 at the end of 6 months
C)The counterparty pays $3,0084.52 at the end of 3 months
D)The counterparty pays $3,0084.52 at the end of 6 months
Q2) Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of .75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17 32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1 8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan?
A)$79,921.875
B)$91,171.88
C)$96,174.39
D)$364,687.52
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Page 13
Chapter 12: International Bond Market
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Q1) In the bond market, there are brokers and market makers. Which of the following are true?
A)Brokers accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade; they may also trade for their own account.
B)Brokers charge a small commission for their services to the market maker that engaged them.
C)Brokers do not deal directly with retail clients.
D)All of the above
Q2) Shelf registration
A)allows the shelves in a set of bookshelves to remain level.
B)allows an issuer to preregister a securities issue, and then "shelve" the securities for later sale.
C)allows an investment bank to increase the fees they charge by charging for storage of the "shelved" securities.
D)eliminates the information disclosure that many foreign firms found objectionable in the foreign bond market.
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Chapter 13: International Equity Markets
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Q1) A crowd of floor traders on the NYSE
A)may arrive at a more favorable price for their clients "inside" the specialist's bid and ask quotes.
B)are obliged to execute their trades through a specialist.
C)are allowed to "front run" their own trades ahead of customer trades.
D)all of the above
Q2) Studies examining the influence of industrial structure on foreign equity returns
A)conclusively show a connection.
B)have been inconclusive.
C)show that industrialized economies outperform lesser developed economies.
D)none of the above
Q3) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
Q4) In which type of policy actions by the Fed can liquidity "dry up"?
A)Easy money
B)Tight money
C)Decrease in the reserve requirement
D)Decrease in the discount rate
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.
A)LIBOR + ½ percent
B)LIBOR
C)LIBOR - ½ percent
D)None of the above
Q2) In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because
A)it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments.
B)it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts.
C)none of the above
Q3) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q4) What would be the interest rate?
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Page 16
Chapter 15: International Portfolio Investment
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Q1) Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels: (i) - the volatility of the investment due to the volatility of the exchange rate (ii) - the contribution of the cross-product term (iii) - its covariance with the local market returns
Which of the following contributes and accounts for most of the volatility?
A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iii)
D)only (ii)
Q2) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54. Spot exchange rates at the start and end of the year are shown in the table.
Q3) American Depository Receipt (ADRs) represent foreign stocks
A)denominated in U.S. dollars that trade on European stock exchanges.
B)denominated in U.S. dollars that trade on a U.S. stock exchange.
C)denominated in a foreign currency that trade on a U.S. stock exchange.
D)non-registered (bearer) securities.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Unlike the theory of international trade or the theory of international portfolio investment,
A)we do not have a well-developed, comprehensive theory of FDI.
B)the comprehensive theory of FDI focuses on mean-variance efficiency.
C)the comprehensive theory of FDI is an arbitrage argument, like interest rate parity.
D)none of the above
Q2) In a study of the effect of international acquisitions on the stock prices of U.S. firms.
U.S. acquiring firms with information-based intangible assets experience a significantly positive stock price reaction upon foreign acquisition.
A)This is consistent with the finding that the market value of the firm is positively related to its multinationality because of the firm's intangible assets, such as R&D capabilities, with public good nature.
B)It is not the multinationality per se that contributes to the firm's value.
C)Their empirical findings support the (forward-) internalization theory of FDI.
D)All of the above
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Page 18
Chapter 17: International Capital Structure and the Cost of Capital
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Q1) A reduced cost of equity capital increases the firm's value
A)through revaluation of the firm's existing cash flows from existing projects.
B)through increased investment as more projects become positive NPVs.
C)both a and b
D)none of the above
Q2) Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
A)by moving to a better county.
B)by listing their stocks in countries with strong investor protection.
C)by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D)having a press conference and promising to be nice to their investors.
Q3) The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. What is the firm's cost of equity capital?
A)33.33%
B)10.85%
C)13.12%
D)16.50%
E)None of the above
Page 19
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Chapter 18: International Capital Budgeting
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Q1) Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
Q2) Using the APV method, what is the value of the debt side effects?
A)$239,072,652.70
B)$66,891,713.66
C)$59,459,301.03
D)$660,000,000
E)None of the above
Q3) What is the unlevered after-tax incremental cash flow for year 30?
A)$12,432,300
B)$12,225,390
C)$12,332,300
D)$12,485,000
E)None of the above
Q4) Find the dollar cash flows to compute the dollar-denominated NPV of this project. Please note that your answer is worth ZERO POINTS if it does not contain currency symbols.
Q5) What is the dollar-denominated IRR of this project?
Q6) What is the dollar-denominated IRR of this project?
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency, limiting conversion to other currencies, a MNC's frustrated remittance of profits from a subsidiary would be
A)blocked funds.
B)stopped funds.
C)constipated funds.
D)money down the toilet.
Q2) With regard to cash management systems in practice, studies suggest that the benefits of a multilateral netting system include
A)the decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.
B)the savings in administrative time.
C)the reduction in intra company float, which is frequently as high as five days, even for wire transfers.
D)all of the above
Q3) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False
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Chapter 20: International Trade Finance
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Q1) If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?
Q2) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q3) If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?
Q4) The primary methods of payment for foreign trades, ranked in the order of most secure to least secure for the exporter is
A)open account, consignment, letter of credit/time draft, and cash in advance. B)consignment, letter of credit/time draft, cash in advance, and open account.
C)cash in advance, letter of credit/time draft, consignment, and open account.
D)cash in advance, letter of credit/time draft, open account, and consignment.
Q5) If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?
Q6) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q7) If the exporter's opportunity cost of capital is 11 percent, should he discount the B/A or hold it to maturity?
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Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) The worldwide or residential method of declaring a national tax jurisdiction is to A)tax national residents of the country on their worldwide income no matter in which country it is earned.
B)tax all income earned within the country by any taxpayer, domestic or foreign.
C)tax foreign residents of the country on their home-country income but not foreign-earned income.
D)none of the above
Q2) The underlying principle of tax equity is that
A)all similarly situated taxpayers should participate in the cost of operating the government according to the same rules.
B)all similarly situated taxpayers should participate in the cost of operating the government on an equal basis.
C)none of the above
Q3) Withholding tax rates imposed through tax treaties are A)bilateral.
B)multilateral.
C)netted.
D)none of the above
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