Multinational Financial Management Exam Bank
Course Introduction
Multinational Financial Management explores the principles, strategies, and practices necessary for effective financial decision-making in the global context. The course examines the challenges faced by multinational corporations in areas such as foreign exchange risk, international capital budgeting, global financing, and investment decisions in diverse regulatory and economic environments. Students analyze the impact of international financial markets, currency fluctuations, and cross-border taxation on organizational performance, and learn to develop strategies for managing risk and maximizing returns in multinational operations. The course blends theoretical frameworks with real-world case studies to prepare students for the complexities of international finance.
Recommended Textbook
International Financial Management 8th Edition by Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) Franchising is the process by which national governments sell state owned operations to corporations and other investors.
A)True
B)False
Answer: False
Q2) According to the text,a disadvantage of licensing is that:
A) it prevents a firm from importing.
B) it is difficult to ensure quality control of the produc tion process.
C) it prevents a firm from exporting.
D) none of the above
Answer: B
Q3) One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems.
A)True
B)False
Answer: True
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Chapter 2: International Flow of Funds
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Q1) The North American Free Trade Agreement (NAFTA)increased restrictions on:
A) trade between Canada and Mexico.
B) trade between Canada and the U.S.
C) direct foreign investment in Mexico by U.S. firms.
D) none of the above.
Answer: D
Q2) According to the text,international trade (exports plus imports combined)as a percentage of GDP is:
A) higher in the U.S. than in European countries.
B) lower in the U.S. than in European countries.
C) higher in the U.S. than in about half the European countries, and lower in the U.S. than the others.
D) about the same in the U.S. as in European countries.
Answer: B
Q3) The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.
A)True
B)False
Answer: True
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Page 4
Chapter 3: International Financial Markets
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Sample Questions
Q1) The Basel II accord would:
A) replace the Basel Accord.
B) reduce the amount of capital banks are required to hold.
C) require banks to take more risks and to document their risk.
D) correct some inconsistencies that still exist.
Answer: D
Q2) _______ is not a bank characteristic important to customers in need of foreign exchange.
A) Quote competitiveness
B) Speed of execution
C) Forecasting advice
D) Advice about current market conditions
E) All of the above are important bank characteristics to customers in need of foreign exchange.
Answer: E
Q3) A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
A)True
B)False
Answer: True
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Chapter 4: Exchange Rate Determination
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Q1) The exchange rates of smaller countries are very stable because the market for their currency is very liquid.
A)True
B)False
Q2) News of a potential surge in U.S.inflation and zero Chilean inflation places _______ pressure on the value of the Chilean peso. The pressure will occur _______.
A) upward;only after the U.S. inflation surges
B) downward;only after the U.S. inflation surges
C) upward;immediately
D) downward;immediately
Q3) Assume that the U.S.places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant,this event should immediately cause the U.S.demand for Chilean pesos to _______ and the value of the peso to _______.
A) increase;increase
B) increase;decline
C) decline;decline
D) decline;increase
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Chapter 5: Currency Derivatives
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Q1) A straddle is a speculative strategy that represents the purchase of both a call and a put.
A)True
B)False
Q2) Currency futures contracts sold on an exchange:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner. C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
Q3) 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
Q4) Futures and options are available for crossrates.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Q1) During the period 1944-1971,the U.S.used a __________ system.
A) euro exchange rate
B) fixed
C) dirty float
D) flexible
Q2) A country with a currency board does not have control over its local interest rates.
A)True
B)False
Q3) An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
A)True
B)False
Q4) An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the Yen vs.the dollar.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) 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.
Q2) Assume the following information:
You have $400,000 to invest
Current spot rate of Sudanese dinar (SDD) = $.00570
90-day forward rate of the dinar = $.00569
90-day interest rate in the U.S.= 4.0%
90-day interest rate in Sudan = 4.2%
If you conduct covered interest arbitrage,what amount will you have after 90 days
A) $416,000.00.
B) $416,800.00.
C) $424,242.86.
D) $416,068.77.
E) none of the above
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Chapter 8: Relationships among Inflation,Interest Rates,and Exchange Rates
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Q1) Assume that the U.S.and Chile nominal interest rates are equal.Then,the U.S.nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect,this implies expectations of _______ than before,and that the Chilean peso should _______ against the dollar.
A) lower U.S. inflation;depreciate
B) lower U.S. inflation;appreciate
C) higher U.S. inflation;depreciate
D) higher U.S. inflation;appreciate
Q2) According to the international Fisher effect (IFE),the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
A)True
B)False
Q3) Under purchasing power parity,the future spot exchange rate is a function of the initial spot rate in equilibrium and:
A) the income differential.
B) the forward discount or premium. C) the inflation differential.
D) none of the above
Page 10
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Chapter 9: Forecasting Exchange Rates
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Q1) Which of the following is true
A) Nominal forecast errors cannot be negative.
B) Nominal forecast errors are negative when the forecasted rate exceeds the realized rate.
C) Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
D) None of the above.
Q2) Assume that the U.S.interest rate is 11 percent,while Australia's one-year interest rate is 12 percent.Assume interest rate parity holds.If the one-year forward rate of the Australian dollar was used to forecast the future spot rate,the forecast would reflect an expectation of:
A) depreciation in the Australian dollar's value over the next year.
B) appreciation in the Australian dollar's value over the next year.
C) no change in the Australian dollar's value over the next year.
D) information on future interest rates is needed to answer this question.
Q3) Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
A)True
B)False
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Page 11
Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
A)True
B)False
Q2) The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
A)True
B)False
Q3) According to the text,currency variability levels _______ perfectly stable over time,and currency correlations _______ perfectly stable over time.
A) are;are not
B) are;are
C) are not;are not
D) are not;are
Q4) One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.
A)True
B)False
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) A call option exists on British pounds with an exercise price of $1.60,a 90day expiration date,and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60,a 90day expiration date,and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received,after deducting payment for the option premium.
A) $1,169,000.
B) $1,099,000.
C) $1,106,000.
D) $1,143,100.
E) $1,134,000.
Q2) Currency futures are very similar to forward contracts,except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
A)True
B)False
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Page 13
Chapter 12: Managing Economic Exposure and Translation Exposure
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Q1) An effective for an MNC to assess its economic exposure is to look at the firm's: A) income statement.
B) liquidity.
C) retained earnings.
D) level of stochholder's equity.
Q2) Springfield Co.,based in the U.S.,has a cost of goods sold attributable to foreign material orders that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would _______ a stronger dollar and would _______ a weaker dollar.
A) benefit from;be unaffected by
B) benefit from;be adversely affected by C) be unaffected by;be adversely affected by D) be unaffected by;benefit from
E) benefit from;benefit from
Q3) Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Q1) According to your text,_______________ is a country that has been perceived as one of the most attractive sources of new demand.
A) Paraguay
B) Morocco
C) Sweden
D) China
Q2) Which of the following is a reason to consider international business
A) economies of scale.
B) exploit monopolistic advantages.
C) diversification.
D) all of the above
Q3) Consider Firm "A" and Firm "B" that both produce the same product. Firm "A" would more likely have more stable cash flows if its percentage of foreign sales were __________ and the number of foreign countries it sold products to was
A) higher;large.
B) higher;small
C) lower;small
D) higher;large
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Page 15
Chapter 14: Multinational Capital Budgeting
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Q1) Petrus Company has a unique opportunity to invest in a two-year project in Australia.The project is expected to generate 1,000,000 Australian dollars (A$)in the first year and 2,000,000 Australian dollars in the second.Petrus would have to invest $1,500,000 in the project.Petrus has determined that the cost of capital for similar projects is 14%.What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60,respectively
A) $2,905,817.
B) -$94,183.
C) $916,128.
D) none of the above
Q2) If the parent's government imposes a _______ tax rate on funds remitted from a foreign subsidiary,a project is less likely to be feasible from the _________ point of view.
A) high;subsidiary's
B) high;parent's
C) low;parent's
D) A and C
E) none of the above
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Page 16
Chapter 15: Multinational Restructuring
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Q1) Even if an existing business adds value to an MNC,it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured.
A)True
B)False
Q2) Which of the following types of international restructuring is probably the most difficult to value by an MNC
A) international acquisition.
B) newly privatized foreign business.
C) international alliance.
D) international divestiture.
Q3) An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
A)True
B)False
Q4) An MNC should periodically reassess its investments to determine whether to divest them.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Q1) The checklist approach:
A) requires several inspections of the country being evalu ated.
B) requires ratings and weights to be assigned to all factors relevant in assessing country risk.
C) requires the use of discriminant analysis to assess country risk.
D) involves the collection of independent opinions on country risk.
Q2) Insurance purchased to cover the risk of expropriation __________,and will typically cover __________.
A) will be the same for all firms;only a portion of the firm's total exposure.
B) will be the same for all firms;all of the firm's total exposure.
C) will be dependent on the firm's risk;all of the firm's total exposure.
D) will be dependent on the firm's risk;only a portion of the firm's total exposure.
Q3) Country risk assessment should be used when:
A) determining whether to establish a subsidiary in a foreign country.
B) determining whether to continue business in a foreign country.
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) One argument for why subsidiaries should be only partlyowned by the parent is:
A) that the potential conflict of interests between the MNC's managers and shareholders is avoided.
B) that the potential conflict of interests between the MNC's majority shareholders and minority shareholders is avoided.
C) that the potential conflict of interests between the MNC's existing creditors is avoided. D) to offer some protection against threats of any adverse actions by the host government.
Q2) 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
Q3) Normally,an MNC will issue stock in all of the countries where it does business.
A)True
B)False
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Page 19
Chapter 18: Long-Term Financing
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Q1) Currency swaps,whereby two parties exchange currencies at a specified point in time for a specified price,are often used by MNCs to hedge against interest rate risk.
A)True
B)False
Q2) 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 the currency denominating the bonds.
Q3) U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offset exposure to exchange rate risk by issuing bonds denominated in the subsidiary's local currency.
A)True
B)False
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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Q1) Which of the following payment terms provides the supplier with the greatest degree of protection
A) letters of credit.
B) consignment.
C) prepayment.
D) drafts (sight/time).
Q2) In ___________,the exporter sells accounts receivable without recourse.
A) accounts receivable financing
B) factoring
C) working capital financing
D) countertrade
Q3) ___________ is not a type of program offered by Ex-Imbank.
A) Guarantees
B) Loans
C) Currency swap insurance
D) Bank insurance
Q4) The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
A)True
B)False
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Chapter 20: Short-Term Financing
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Q1) One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.
A)True
B)False
Q2) If interest rate parity exists,the attempt to finance with a foreign currency while covering the position to avoid exchang 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) If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __________ and the individual variability of each currency is
A) high;low
B) high;high
C) low;low
D) low;high
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Page 22
Chapter 21: International Cash Management
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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) The international Fisher effect suggests that:
A) the effective yield on short term foreign securities should, on average, equal the yield on short term domestic securities.
B) the effective yield on short term securities of high inflation countries is greater than the yield on short term domestic securities.
C) if domestic income grows faster than foreign income, the effective yield on short term foreign securities is higher than short term domestic securities.
D) if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.
Q3) Centralized cash management is more complicated when the MNC uses multiple currencies.
A)True
B)False
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