International Financial Management
Exam Answer Key
Course Introduction
International Financial Management explores the fundamental concepts and analytical tools necessary for making sound financial decisions in a global business environment. Students will examine topics such as exchange rate mechanics, international capital markets, risk management, financing and investment across borders, and multinational capital budgeting. Emphasis is placed on understanding how international economic events, currency fluctuations, and political risks impact the operations and strategic decision-making of multinational corporations. Through case studies and real-world examples, students will gain the skills needed to analyze and solve complex financial issues facing businesses in an increasingly interconnected world.
Recommended Textbook
International Financial Management 8th Edition by Madura
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21 Chapters
1110 Verified Questions
1110 Flashcards
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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42 Verified Questions
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Sample Questions
Q1) Although MNCs may need to convert currencies occasionally,they do not face any exchange rate risk,as exchange rates are stable over time.
A)True
B)False
Answer: False
Q2) For the MNC,agency costs are typically:
A) non existent.
B) larger than agency costs of a small purely domestic firm.
C) smaller than agency costs of a small purely domestic firm.
D) the same as agency costs of a small purely domestic firm.
Answer: B
Q3) A centralized management style for an MNC results in relatively high agency costs.
A)True
B)False
Answer: False
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) Recently,the U.S.experienced an annual balance of trade representing a
A) large surplus (exceeding $100 billion)
B) small surplus
C) level of zero
D) deficit
Answer: D
Q2) The World Bank was established to:
A) enhance development solely in Asia through grants.
B) enhance economic development through non subsidized loans (at market interest rates).
C) enhance economic development through low interest rate loans (below market rates).
D) enhance economic development of the private sector through investment in stock of corporations.
Answer: B
Q3) A tariff is a maximum limit on imports.
A)True
B)False
Answer: False
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Chapter 3: International Financial Markets
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Sample Questions
Q1) An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.
A)True
B)False
Answer: False
Q2) When the foreign exchange market opens in the U.S.each morning,the opening exchange rate quotations will be based on the:
A) closing prices in the U.S. during the previous day.
B) closing prices in Canada during the previous day.
C) prevailing prices in locations where the foreign exchange markets have been open.
D) officially set by central banks before the U.S. market opens.
Answer: C
Q3) The forward market:
A) for euros is very illiquid.
B) for Eastern European countries is very liquid.
C) does not exist for some currencies.
D) none of the above
Answer: C
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5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) The exchange rates of smaller countries are very stable because the market for their currency is very liquid.
A)True
B)False
Q2) The value of the Australian dollar (A$)today is $0.73.Yesterday,the value of the Australian dollar was $0.69.The Australian dollar ________ by _______%.
A) depreciated;5.80
B) depreciated;4.00
C) appreciated;5.80
D) appreciated;4.00
Q3) When expecting a foreign currency to depreciate,a possible way to speculate on this movement is to borrow dollars,convert the proceeds to the foreign currency,lend in the foreign country,and use the proceeds from this investment to repay the dollar loan.
A)True
B)False
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6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) If an investor who previously sold futures contracts wishes to liquidate his or her position,he or she could sell futures contracts with the same maturity date.
A)True
B)False
Q2) A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised,what is the total amount of dollars received (after accounting for the premium paid)
A) $6,875,000.
B) $7,250,000.
C) $7,000,000.
D) $6,500,000.
E) none of the above
Q3) Since futures contracts are traded on an exchange,the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) To force the value of the pound to appreciate against the dollar,the Federal Reserve should:
A) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
D) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.
Q2) A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on private enterprise than the governments of other Asian countries.
A)True
B)False
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8
Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume the U.S.interest rate is 2% higher than the Swiss rate,and the forward rate of the Swiss franc has a 4% premium. Given this information:
A) Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.
B) U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.
C) A and B
D) none of the above
Q2) Assume the following exchange rates: $1 = NZ$3,NZ$1 = MXP2,and $1 = MXP5. Given this information,as you and others perform triangular arbitrage,the exchange rate of the New Zealand dollar (NZ)with respect to the U.S.dollar should _______,and the exchange rate of the Mexican peso (MXP)with respect to the U.S.dollar should _______.
A) appreciate;depreciate
B) depreciate;appreciate
C) depreciate;depreciate
D) appreciate;appreciate
E) remain stable;appreciate
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Chapter 8: Relationships among Inflation,Interest Rates,and Exchange Rates
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Sample Questions
Q1) Because there are a variety of factors in addition to inflation that affect exchange rates,this will:
A) reduce the probability that PPP shall hold.
B) increase the probability that PPP shall hold.
C) increase the probability the IFE will hold.
D) B and C
Q2) Which of the following is not true regarding IRP,PPP,and the IFE
A) IRP suggests that a currency's spot rate will change according to interest rate differentials.
B) PPP suggests that a currency's spot rate will change according to inflation differentials.
C) The IFE suggests that a currency's spot rate will change according to interest rate differentials.
D) All of the above are true.
Q3) The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.
A)True
B)False
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) The U.S.inflation rate is expected to be 4 percent over the next year,while the European inflation rate is expected to be 3 percent.The current spot rate of the euro is $1.03.Using purchasing power parity,the expected spot rate at the end of one year is $________.
A) 1.02
B) 1.03
C) 1.04
D) none of the above
Q2) MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.
A)True
B)False
Q3) Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.
A)True
B)False
Q4) Foreign exchange markets appear to be strong-form efficient.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Assume that Mill Corporation,a U.S.-based MNC,has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: \( P C F_{t}=a_{0}+a_{1} e_{t}+\mu t \)
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t,and \( e_{t} \) is the percentage change in the exchange rate of the currency over period t.The regression model estimates a coefficient of \( a_{1} \) of 2.This indicates that:
A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.
E) none of the above
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Quasik Corporation will be receiving 300,000 Canadian dollars (C$)in 90 days.Currently,a 90-day call option with an exercise price of $.75 and a premium of $.01 is available.Also,a 90-day put option with an exercise price of $.73 and a premium of $.01 is available.Quasik plans to purchase options to hedge its receivable position.Assuming that the spot rate in 90 days is $.71,what is the net amount received from the currency option hedge
A) $219,000.
B) $222,000.
C) $216,000.
D) $213,000.
Q2) MNCs generally do not need to hedge because shareholders can hedge their own risk.
A)True
B)False
Q3) If interest rate parity (IRP)exists,then the money market hedge will yield the same result as the options hedge.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A limitation of hedging translation exposure is that translation losses are not tax deductible,whereas gains on forward contracts used to hedge translation exposure are taxed.
A)True
B)False
Q2) Cierra,Inc.is attempting to assess its degree of economic exposure in euros.In order to do so,it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro.A _______ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are _________ related to the percentage changes in the euro.
A) positive;positively
B) positive;negatively
C) negative;positively
D) B and C
E) none of the above
Q3) In general,it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) Assume the correlation coefficient between the returns on the existing project and the return on a proposed foreign project is 1.Also assume the returns on existing project and the new project are equal,and that the existing project has a lower standard deviation than the proposed project.Under this scenario,undertaking the proposed project will ___________ the variance of the firm's overall returns.
A) decrease
B) increase
C) decrease or increase, depending on the exact size of the returns and standard deviations
D) none of the above
Q2) 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.
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) If a U.S.parent is setting up a French subsidiary,and funds from the subsidiary will be periodically sent to the parent,the ideal situation from the parent's perspective is a ____ after the subsidiary is established.
A) strengthening euro
B) stable euro
C) weak euro
D) B and C are both ideal.
Q2) Assume a U.S.based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso _______,the dollar amount of remitted funds
A) appreciates;decreases
B) depreciates;is unaffected
C) appreciates;is unaffected
D) depreciates;decreases
E) B and C
Q3) In conducting a multinational capital budgeting analysis,the subsidiary's perspective should always be used.
A)True
B)False
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Page 16
Chapter 15: Multinational Restructuring
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Sample Questions
Q1) A target's previous cash flows are typically an accurate indicator of future cash flows,especially when the target's cash flows would have to be converted into the acquirer's home currency as they are remitted to the parent.
A)True
B)False
Q2) A foreign target's expected future cash flows generally vary among different MNCs valuing the target.
A)True
B)False
Q3) An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices are generally high.
A)True
B)False
Q4) From a foreign currency perspective,the ideal conditions would be a weak foreign currency at the time of acquisition and a strengthening of the foreign currency over time as funds are remitted back to the parent.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.
A)True
B)False
Q2) If a foreign country follows the "Purchase Homemade Products" philosophy,the least effective strategy would be for a U.S.firm to:
A) use a licensing arrangement with a local firm in that country.
B) enter into a joint venture in that country.
C) develop a subsidiary (under the U.S. name) that manufac tures and sells products in that country.
D) develop a subsidiary (under the U.S. name) that manufac tures products in that country and exports them to border countries.
Q3) Risk assessors almost always arrive at the same opinion after completing a macroassessment of country risk.
A)True
B)False
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18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) Based on the factors that influence a country's cost of capital,the cost of capital in less developed countries is likely to be _______ than that of the U.S.and _______ than that of Japan.
A) higher;higher
B) higher;lower
C) lower;lower
D) lower;higher
Q2) According to the text,MNCs:
A) use only debt financing in foreign countries to support foreign subsidiaries.
B) use only equity financing in foreign countries to support foreign subsidiaries.
C) use only parent financing in foreign countries to support foreign subsidiaries.
D) none of the above
Q3) When an MNC's firm's cost of capital rises,it would be _______ likely to divest an existing project,other things held constant.
A) more
B) less
C) neither;there is no effect
D) neither;MNCs do not ever divest projects
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Chapter 18: Long-Term Financing
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Sample Questions
Q1) 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.
Q2) Many MNCs simultaneously swap interest payments and currencies. A)True B)False
Q3) If U.S.firms issue bonds in _______,the dollar outflows to cover fixed coupon payments increase as the dollar _______.
A) a foreign currency;weakens B) dollars;strengthens
C) a foreign currency;strengthens
D) dollars;weakens
Q4) Eurobonds are often issued with a floating coupon rate that is tied to LIBOR.
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) A banker's acceptance is a draft drawn on and accepted by a(an)__________.
A) bank
B) importer
C) exporter
D) none of the above
Q3) A(n)___________ is an unconditional promise drawn by one party,instructing the buyer to pay the face amount upon presentation.
A) draft
B) bill of lading
C) trade acceptance
D) letter of credit
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21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate
A) 12%.
B) 30%.
C) 100%.
D) 0%.
E) none of the above
Q2) What is the expected effective financing rate of the portfolio Martha is contemplating (assume the two currencies move independently from one another)
A) 9.03%.
B) 7.00%.
C) 10.00%.
D) 7.59%.
E) none of the above
Q3) ___________ typically have maturities of less than one year.
A) Eurobonds
B) Euro-commercial paper
C) Euronotes
D) ADRs
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Page 22
Chapter 21: International Cash Management
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Sample Questions
Q1) The most useful measure of an MNC's liquidity is its:
A) cash balance.
B) amount of securities held as investments.
C) political risk rating.
D) potential access to funds.
Q2) If the international Fisher effect (IFE)exists,then a U.S.firm that has access to banks offering high interest rates in deposits denominated in foreign currencies should:
A) invest in the foreign deposits since they will, on average, generate higher effective yields than a U.S. deposit.
B) invest in the U.S. deposits since they will, on average, generate higher effective yields than a foreign deposit.
C) invest in the U.S. deposits since they will, on average, generate similar effective yields as a foreign deposit.
D) invest in the foreign deposits since they will, on average, generate similar effective yields as a U.S. deposit.
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