International Financial Management
Study Guide Questions
Course Introduction
International Financial Management explores the principles and practices of managing finance in a global context, focusing on key topics such as foreign exchange markets, exchange rate determination, international financial markets, risk management, and cross-border investment strategies. The course examines how multinational corporations identify, assess, and mitigate financial risks arising from currency fluctuations, political instability, and differing regulatory environments. Students will gain insight into international capital budgeting, global financing strategies, and the impact of international financial institutions, equipping them with an understanding of how to make informed financial decisions in the dynamic and interconnected world of global business.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Q1) Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk.
A)True
B)False
Answer: False
Q2) The valuation of an MNC is reduced if the required return on its investments in foreign countries is reduced.
A)True
B)False
Answer: False
Q3) ____ are most commonly classified as a direct foreign investment.
A) Foreign acquisitions
B) Purchases of international stocks
C) Licensing agreements
D) Exporting transactions
Answer: A
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Page 3
Chapter 2: International Flow of Funds
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Q1) Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.
A) low; small
B) high; small
C) low; large
D) high; large
Answer: C
Q2) U.S. government officials would likely prefer that China devalue the yuan against the dollar.
A)True
B)False
Answer: False
Q3) A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time.
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) The strike price is also known as the premium price.
A)True
B)False
Answer: False
Q3) The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets.
A)True
B)False
Answer: False
Q4) The strike price on a currency option is also known as an exercise price.
A)True
B)False
Answer: True
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Chapter 4: Exchange Rate Determination
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Q1) The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:
A) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
B) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
C) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.
D) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.
Q2) The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?
A)$1.365
B)$1.235
C)$1.330
D)$1.30
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Chapter 5: Currency Derivatives
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Q1) A forward rate for a currency is said to exhibit a discount if
A) the forward rate exceeds the existing spot rate.
B) the forward rate is less than the existing spot rate.
C) the forward rate exceeds the expected future spot rate.
D) the forward rate is less than the expected future spot rate.
E) none of the above
Q2) If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.
A) selling; buying; buying
B) buying; selling; buying
C) selling; buying; selling
D) buying; buying; buying
Q3) The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?
A) 7.46% premium
B) 7.46% discount
C) 7.75% premium
D) 7.75% discount
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Page 7
Chapter 6: Government Influence on Exchange Rates
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Q1) To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.
A) buy; sell
B) sell; buy
C) buy; buy
D) sell; sell
Q2) Countries that have adopted the euro must agree on a single ____ policy.
A) monetary
B) fiscal
C) worker compensation
D) foreign relations
Q3) A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.
A)True
B)False
Q4) Market forces are the determinant of exchange rates in a freely floating exchange rate system.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.
A)True
B)False
Q2) Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.
A)True
B)False
Q3) Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the U.S. and the foreign country.
A)True
B)False
Q4) Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
A)True
B)False
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Q1) Among the reasons that purchasing power parity (PPP) does not consistently occur are:
A) exchange rates are affected by interest rate differentials.
B) exchange rates are affected by national income differentials and government controls.
C) supply and demand may not adjust if no substitutable goods are available.
D) all of the above are reasons that PPP does not consistently occur.
Q2) Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:
A) interest rate parity.
B) locational arbitrage.
C) purchasing power parity.
D) the exchange rate mechanism.
Q3) The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.
A)True
B)False
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Chapter 9: Forecasting Exchange Rates
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Q1) Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: S<sub>t</sub> = a<sub>0</sub> + a<sub>1</sub>Ft <sub>-1</sub> + mt, Where S<sub>t</sub> is the spot rate of the pound in year t and Ft <sub>-1</sub> is the forward rate of the pound in year t - 1. Regression results reveal coefficients of a<sub>0</sub> = 0 and a<sub>1</sub> = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
A) overestimated
B) underestimated
C) correctly estimated
D) none of the above
Q2) In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.
A) Transaction
B) Economic
C) Translation
D) None of the above
Q2) The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.
A)True
B)False
Q3) Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.
A)True
B)False
Q4) A reduction in hedging will probably reduce transaction exposure.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Q1) You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:
\[\begin{array} { c c }
\text { Future Spot Rate } & \text { Probability } \\
\$ .01035 & 20 \% \\
\$ .01032 & 20 \% \\
\$ .01030 & 30 \% \\
\$ .01029 & 30 \%
\end{array}\]
The 90-day forward rate of the Japanese yen is $.01033. What is the probability that the call option will be exercised (assuming Montana purchased it)?
A) 30%
B) 60%
C) 20%
D) 40%
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Q1) Managing economic exposure is generally perceived to be ____ managing transaction exposure.
A) more difficult than B) less difficult than C) just as difficult as D) none of the above
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) All MNCs are subject to transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
A)True
B)False
Q2) According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:
A) would compete with local firms of the host country.
B) would produce a good not currently available in the host country.
C) would produce a good and export it to other countries.
D) B and C
Q3) The most important cost-related motive for direct foreign investment is diversification across product markets.
A)True
B)False
Q4) Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) The break-even salvage value of a particular project is the salvage value necessary to:
A) offset any losses incurred by the subsidiary in a given year.
B) offset any losses incurred by the MNC overall in a given year.
C) make the project have zero profits.
D) make the project's return equal the required rate of return.
Q2) Which of the following is not a factor that should be considered in multinational capital budgeting?
A) Blocked funds
B) Exchange rate fluctuations
C) Inflation
D) Financing arrangements
E) All of the above should be considered.
Q3) Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.
A) higher; lower
B) higher; higher
C) lower; higher
D) none of the above
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Page 16
Chapter 15: International Corporate Governance and Control
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Q1) As far as the managerial talent of the target is concerned:
A) the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target.
B) downsizing will reduce expenses and increase productivity and revenues.
C) governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated.
D) all of the above
E) A and C only
Q2) The ideal time to purchase a foreign company is when the spot rate of that company's currency is perceived to be very high and is expected to decrease over time.
A)True
B)False
Q3) The valuation of a target (from the parent's perspective) should increase when the potential acquirer's cost of capital increases.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) A macro-assessment of country risk:
A) is adjusted for the particular business of the firm involved.
B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above
Q2) Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC's business.
A)True
B)False
Q3) ____ is (are) not a form of political risk.
A) Exchange rate movements
B) Attitude of consumers in the host country
C) Actions of the host government
D) Blockage of fund transfers
E) All of the above are forms of political risk
Q4) A micro-assessment of country risk:
A) is adjusted for the particular business of the firm involved.
B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.
A)True
B)False
Q2) Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ is relevant.
A) unsystematic; unsystematic
B) unsystematic; systematic
C) systematic; unsystematic
D) systematic; systematic
Q3) Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.
A)True
B)False
Q4) If an MNC's cash flows are more stable, it can probably handle more debt than an MNC with erratic cash flows.
A)True
B)False
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Chapter 18: Long-Term Debt Financing
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Q1) If the currency of a foreign currency-denominated bond ____, the funds needed to make coupon payments will ____.
A) appreciates; increase
B) depreciates; decrease
C) appreciates; decrease
D) depreciates; increase
E) A and B
Q2) Countries in emerging markets such as in Latin America tend to have ____ interest rates, and so the yields offered on bonds issued in those countries is ____.
A) low; high
B) high; low
C) high; high
D) none of the above
Q3) A ____ gives its owner the right to enter into a swap.
A) basis swap
B) swaption
C) callable swap
D) putable swap
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Chapter 19: Financing International Trade
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Q1) The Direct Loan Program is administered by the:
A) Private Export Funding Corporation (PEFCO).
B) Overseas Private Investment Corporation (OPIC).
C) Ex-Imbank.
D) Foreign Credit Insurance Association (FCIA).
Q2) In ____, a bank arranges to fund a loan to pay the exporter instead of charging the importer's account immediately.
A) refinancing of a sight letter of credit
B) a banker's acceptance
C) a short-term bank loan
D) accounts receivable financing
Q3) ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
A) A standby L/C
B) A transferable L/C
C) Assignment of proceeds
D) None of the above
Q4) The payment method that affords the supplier the greatest degree of protection is the prepayment method.
A)True
B)False
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Chapter 20: Short-Term Financing
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Q1) Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____ in order to have the same effective financing rate from borrowing dollars.
A)depreciate; about 3.74%
B)appreciate; about 3.74%
C)appreciate; about 4.53%
D)depreciate; about 4.53%
Q2) If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.
A) lower than B) greater than C) similar to D) none of the above
Q3) Countries with a ____ rate of inflation tend to have a ____ interest rate.
A) high; low B) low; high C) high; high D) A and B are correct
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Page 22
Chapter 21: International Cash Management
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Q1) Assume that Subsidiaries X and Y often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help out Subsidiary Y?
A) X should lag its payments sent to Y to pay for imports from Y.
B) X should request that Y lead its payments to be sent for goods that Y sent to X.
C) A and B
D) None of the above
Q2) Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even level of depreciation in the euro at which the U.S. and French investments would exhibit the same return to a U.S. investor is:
A) about 5.1%.
B) about 6.8%.
C) about 6.3%.
D) about 5.9%.
Q3) Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed.
A)True
B)False
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