International Investment
Chapter Exam Questions
Course Introduction
International Investment examines the theories, practices, and strategies involved in investing across national borders. The course covers topics such as foreign direct investment (FDI), portfolio investment, international financial markets, risk assessment, and the impact of global economic policies and regulations on investment decisions. Students explore the motivations and challenges faced by multinational corporations and institutional investors, including currency risk, political and legal environments, and market entry strategies. Through case studies and real-world examples, the course provides practical insights into managing international investment portfolios and understanding the dynamic global investment landscape.
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International Financial Management 13th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Q1) An MNC's value depends on all of the following, except:
A)the MNC's required rate of return.
B)the amount of the MNC's cash flows in a particular currency.
C)the exchange rate at which cash flows are converted to dollars.
D)all of the above factors
Answer: D
Q2) The least risky method by which firms conduct international business is:
A)franchising
B)acquisitions of existing operations.
C)international trade.
D)the establishment of new subsidiaries.
E)licensing
Answer: C
Q3) Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries
A)True
B)False
Answer: True
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Chapter 2: International Flow of Funds
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Q1) The World Trade Organization was established to provide a forum for multilateral trade negotiations and to settle trade disputes.
A)True
B)False
Answer: True
Q2) Which of the following statements is not true?
A)Exporters commonly complain that they are being mistreated because the currency of their country is too weak.
B)Outsourcing affects the balance of trade because it means that a service is purchased in another country.
C)Sometimes, trade policies are used to punish countries for various actions.
D)Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.
E)All of the above are true.
Answer: A
Q3) The primary component of the capital account is the balance of trade. A)True
B)False
Answer: False
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Page 4
Chapter 3: International Financial Markets
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Q1) Which of the following cannot be used to invest internationally?
A)investment in MNC stocks
B)American depository receipts (ADRs)
C)exchange-traded funds (ETFs)
D)international mutual funds
E)All of the above can be used to invest internationally.
Answer: A
Q2) Global regulations prevent the internationalization of moeny markets.
A)True
B)False
Answer: False
Q3) Which of the following is not true regarding the Bretton Woods Agreement?
A)It called for fixed exchange rates between currencies.
B)Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels.
C)The agreement lasted from 1944 until 1971.
D)Each country used gold to back its currency.
E)All of the above are true regarding the Bretton Woods Agreement.
Answer: D
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.
A)reduce; increase B)increase; reduce C)reduce; reduce D)increase; increase
Q2) If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
A)liquid; highly sensitive
B)illiquid; insensitive
C)illiquid; highly sensitive
D)none of the above
Q3) Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency's value will change, and how they will interact to impact the currency's value
A)True
B)False
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Chapter 5: Currency Derivatives
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Q1) A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:
A)selling futures in francs.
B)buying futures in francs.
C)buying franc put options.
D)buying franc call options.
Q2) A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:
A)in the money.
B)out of the money.
C)at the money.
D)at a discount.
Q3) The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Q1) Dollarization refers to the replacement of local currency with U.S. dollars.
A)True
B)False
Q2) Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.
A)decrease; increase
B)decrease; decrease C)increase; decrease D)increase; increase
Q3) A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on financial flows than the governments of other Asian countries.
A)True
B)False
Q4) A country with fixed exchange rates oFten faces constraints on growth.
A)True
B)False
Page 8
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Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent
A)True
B)False
Q2) Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
A)larger will be the forward discount of the foreign currency.
B)larger will be the forward premium of the foreign currency.
C)smaller will be the forward premium of the foreign currency.
D)smaller will be the forward discount of the foreign currency.
Q3) The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent
A)True B)False
Q4) Forward rates are driven by the government rather than market forces
A)True
B)False
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Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) If purchasing power parity holds, then the Fisher effect must also hold.
A)True
B)False
Q2) Assume that the international Fisher effect (IFE) holds between the United States and the United Kingdom. The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7 percent, and the U.S. interest rate is 7 percent. What does this say about real interest rates expected by British investors?
A)Real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
B)Real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
C)Real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
D)IFE doesn't hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.
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Page 10
Chapter 9: Forecasting Exchange Rates
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Q1) A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent.
A)True
B)False
Q2) Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.
A)depreciate by .8 percent; today
B)depreciate by .8 percent; tomorrow
C)appreciate by .8 percent; today
D)appreciate by .8 percent; tomorrow
Q3) The potential forecast error is larger for currencies that are more volatile.
A)True
B)False
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Page 11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____.
A)increase; decrease
B)decrease; remain unchanged
C)decrease; increase
D)increase; remain unchanged
Q2) If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's
A)positive; interest expenses
B)positive; gross profit
C)negative; interest expenses
D)negative; gross profit
Q3) Purely domestic firms are never affected by economic exposure.
A)True
B)False
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries, and it may not be necessary to hedge the position of each individual subsidiary.
A)True
B)False
Q2) An example of cross-hedging is:
A)find two currencies that are highly positively correlated; match the payables in one currency to the receivables in the other currency.
B)use the forward market to sell forward whatever currencies you will receive.
C)use the forward market to buy forward whatever currencies you will receive.
D)B and C
Q3) To hedge a receivables position with a currency option hedge, an MNC would buy a put option.
A)True
B)False
Q4) A futures hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its supplies from American firms and has no competition in the United States. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains its supplies from a Canadian firm. Based on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure.
A)transaction; translation
B)translation; transaction
C)economic; transaction
D)economic; translation
Q2) Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure.
A)reduces; increase B)increases; reduce C)reduces; reduce
D)A and B
E)none of the above
Q3) All MNCs are subject to transaction exposure.
A)True
B)False
Page 14
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) An MNC will likely benefit most from diversifying if:
A)the correlations between country economies are high.
B)the correlations between country economies are low.
C)the variability of all country economy levels is high.
D)B and C
Q2) The ____ the variability of a project's cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project.
A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher
Q3) To enter markets where superior profits are possible, 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 whose business cycles differ from those where existing subsidiaries are based.
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Page 15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. 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
Q2) When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?
A)the withholding tax rate
B)the euro's exchange rate
C)the U.S. tax rate on earnings remitted to the United States
D)the German government's tax rate
E)A and C
Q3) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
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Page 16
Chapter 15: International Corporate Governance and Control
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Questions
Q1) Economic conditions in the host country are probably more important for an MNC that intends to use the target to generate revenues in the host country than an MNC that intends to focus on exporting from the target's home country.
A)True
B)False
Q2) If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.
A)True
B)False
Q3) A foreign target's expected future cash flows generally vary among different MNCs valuing the target.
A)True
B)False
Q4) An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices in the target's country are generally high.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries.
A)True
B)False
Q2) The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with:
A)insurance that covers losses on multilateral netting procedures.
B)exchange rate risk insurance.
C)political risk insurance.
D)guarantees that MNCs will receive the same taxation treatment by the host government as local firms.
E)guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.
Q3) The most reliable way for the capital budgeting analysis to capture country risk is to increase the discount rate for projects in countries with higher perceived risk.
A)True
B)False
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Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) ____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
A)Private placements
B)Domestic equity offerings
C)Global equity offerings
D)Global debt offerings
Q2) Normally, each subsidiary of an MNC will issue its own stock where it does business.
A)True
B)False
Q3) Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.
A)higher; MNCs
B)lower; domestic firms
C)lower; MNCs
D)none of the above
Q4) An MNC's cost of equity is unrelated to the local risk-free rate.
A)True
B)False
Page 19
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Chapter 18: Long-Term Debt Financing
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Q1) A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
A)invoicing its exports in U.S. dollars.
B)requesting that any imports ordered by the firm be invoiced in U.S. dollars.
C)invoicing its exports in euros.
D)requesting that any imports ordered by the firm be invoiced in euros.
Q2) A U.S. firm receives 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 United States. 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.
Q3) If an MNC finances with a currency different from its invoice currency, it would prefer that the loan be denominated in a currency that:
A)exhibits a low interest rate and is expected to appreciate.
B)exhibits a low interest rate and is expected to depreciate.
C)exhibits a high interest rate and is expected to depreciate.
D)exhibits a high interest rate and is expected to appreciate.
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Page 20
Chapter 19: Financing International Trade
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Q1) When an exporter sells an account receivable to a factor, the factor will attempt to collect payment from the importer, but if the importer is unable to pay, the factor can collect the payment from the exporter.
A)True
B)False
Q2) Under prepayment, the exporter will not ship the products until the exporter has received payment from the importer.
A)True
B)False
Q3) As part of the Ex-Im Bank's export credit insurance programs, a(an) ____ Policy is generally issued to an administrator, such as a bank, trading company, insurance broker, or government agency, which then administers the policy for multiple exporters.
A)Multibuyer
B)Single-Buyer
C)Small Business
D)Umbrella
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21
Chapter 20: Short-Term Financing
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Q1) To avoid exchange rate risk when borrowing a foreign currency, an MNC could hedge its position by using interest rate swaps.
A)True
B)False
Q2) Which of the following is a scenario under which a U.S.-based MNC probably would not consider short-term foreign financing?
A)Canadian dollars offer a lower interest rate than is available in the United States and are expected to appreciate over the maturity of the loan.
B)Australian dollars offer a lower interest rate than is available in the United States and are expected to depreciate over the maturity of the loan.
C)The MNC has net receivables in British pounds.
D)A and C
E)None of the above
Q3) Euronotes are underwritten by:
A)European central banks.
B)commercial banks.
C)the International Monetary Fund.
D)the Federal Reserve System.
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22
Chapter 21: International Cash Management
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Q1) Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?
A)6.47 percent
B)8.84 percent
C)8.50 percent
D)none of the above
Q2) To ____, MNCs can use preauthorized payments.
A)accelerate cash inflows
B)minimize currency conversion costs
C)manage blocked funds
D)manage intersubsidiary cash transfers
Q3) Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to some limit.
A)True
B)False
Q4) Lockboxes are post office box numbers assigned to employees for picking up their paychecks.
A)True
B)False
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