Multinational Financial Management
Pre-Test Questions
Course Introduction
Multinational Financial Management explores the financial decision-making processes of firms operating in the global marketplace. This course covers critical topics such as foreign exchange markets, international financial instruments, risk management strategies for currency and political risks, and international capital budgeting. Students will learn how differing regulations, tax laws, and economic systems influence global financial operations and investment strategies. Case studies and practical applications emphasize the challenges and opportunities multinational corporations face when managing funds, financing operations, and maximizing shareholder value across diverse economic and cultural environments.
Recommended Textbook
International Financial Management 2nd Edition by Geert
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Page 2
J Bekaert
Chapter 1: Globalization and the Multinational Corporation
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Q1) Between 2007 and 2010 the world witnessed a full-blown financial crisis that was attributed to
A) subprime mortgage repricing.
B) quantitative easing by the Fed.
C) foreign exchange imbalances.
D) banking failures.
Answer: A
Q2) What is the name for an organization that invests a large pool of money on behalf of another organization such as a bank,insurance company,or a retirement fund?
A) hedge fund
B) private equity firm
C) institutional investor
D) mutual fund
Answer: C
Q3) Why do the anti-globalists see globalization as a threat to the home country?
Answer: Anti-globalists believe that one outcome of globalization is the outsourcing phenomenon which they blame for threatening the home country's work force.
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Chapter 2: The Foreign Exchange Market
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Q1) If you were trading currency in the New York currency market,the exchange rate between two currencies not expressed in U.S.dollars would be known as the ________ quote.
A) direct
B) indirect
C) cross-rate
D) European
Answer: C
Q2) The broker at Deutsche Bank quotes bid-ask rates of ¥104.15-30/$.What would be its direct asking price for yen if the bank's /$ ask rate is .6550?
A) .0061/¥
B) .00628/¥
C) 159.24/¥
D) 164.25/¥
Answer: B
Q3) Describe how an exchange rate is like a market price?
Answer: The direct quote for a currency is the local currency price (numerator)of one unit of foreign currency (denominator).
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4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) From the perspective of the MNC,the most important purpose of the forward markets is the process of ________.
A) hedging
B) arbitraging
C) speculating
D) preventing default
Answer: A
Q2) One of the major reasons for the existence of the forward market is to ________.
A) provide a location for all currency traders to assemble and trade
B) manage currency risk especially risk associated with a transaction
C) hedge transactions involving foreign currency that occurred in the past
D) prevent default in the transaction
Answer: B
Q3) Why are the bid-ask spreads larger in the forward market than in the spot market?
A) because the forward market is less liquid than the spot market
B) because the spot market is more volatile than the forward market
C) because the forward market is more liquid than the spot market
D) because the spot market is less liquid than the forward market
Answer: A
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Chapter 4: The Balance of Payments
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Q1) Tourism would show up on the
A) merchandise account.
B) current account.
C) capital account.
D) A and C.
Q2) Every ________ can be considered to have a corresponding flow of foreign money associated with it,and this flow of foreign money is recorded as a ________.
A) credit transaction
B) current account transaction
C) debit transaction
D) capital account transaction
Q3) If a nation's income exceeds its spending,then
A) savings will exceed domestic investment.
B) the nation must run a current account surplus.
C) the nation must run a capital account deficit.
D) all of the above.
Q4) If a U.S.non-profit makes a large gift to an Israeli agency,how is it handled in the balance of payments?
Q5) Explain the double-entry system of the balance of payments.
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Chapter 5: Exchange Rate Systems
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Q1) When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.
A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves
Q2) What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market,relative to another currency or a "basket" of currencies?
A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency
Q3) Identify the most important components of the official international reserves of a central bank?
Q4) What is the relationship of currency risk in a floating exchange rate system to the future exchange rate changes?
Q5) Why would a central bank buy or sell foreign currency?
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Chapter 6: Interest Rate Parity
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Q1) Interbank interest rates in various cities around the world are often the basis for interest rates in contractual loan agreements.What is the most important of these rates?
A) London Interbank Offer Rate (LIBOR)
B) Frankfurt Interbank Offer Rate (FIBOR)
C) Hong Kong Interbank Offer Rate (HIBOR)
D) Euro Interbank Offer Rate (EURIBOR)
Q2) Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S.dollars.
Q3) What is the name for the bank market for deposits and loans that is denominated in a currency different to the currency of the country in which a bank is operating?
A) internal currency market
B) foreign exchange market
C) external currency market
D) interbank market
Q4) Identify an external currency market and how it operates?
Q5) If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?
Q6) Explain the bid-ask spread in the external currency market?
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) Which one of the following is the only determinant of volatility in the forward currency markets?
A) interest rate parity
B) economic recovery
C) political turmoil
D) variance of the future exchange rates
Q2) What is the main determinant of the volatility of forward market returns?
Q3) Multinational corporations most often hedge their transaction exchange rate risk using currency ________.
A) options
B) futures
C) spreads
D) forward contracts
Q4) If there is no systematic difference between the forward rate and the expected future spot rate,then the expected forward market return should be ________.
A) zero
B) greater than one
C) equal to the stockholders' required rate of return
D) less than one but greater than zero
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) When the external purchasing power or a currency is greater than the internal purchasing power,the currency is said to be ________.
A) overvalued
B) undervalued
C) at parity
D) in arbitrage
Q2) What is the distinction between relative purchasing power parity and absolute purchasing power parity?
Q3) All of the following options are some of the factors that cause deviations from absolute PPP EXCEPT:
A) transaction costs.
B) non-traded goods.
C) balance of payments.
D) changes in relative prices.
Q4) What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?
Q5) Under what conditions could the law of one price be violated?
Page 10
Q6) Explain what is meant by the real exchange rate?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) For pricing-to-market to be effective,producers must assume that markets are
A) segmented.
B) integrated.
C) uninformed of price changes in other market.
D) dominated by traders who trade for reasons other than responses to fundamental economic change.
Q2) Assume foreign currencies are strong in real terms,why would this be the best time to enter the market of a foreign country as an exporter to that market?
Q3) When would be the best time for a firm to enter a foreign market as an exporter?
A) given a change in real exchange rates, when foreign currencies are weak
B) given a change in real exchange rates, when foreign currencies are strong
C) given no change in real exchange rates, when foreign currencies are weak
D) given no change in real exchange rates, when foreign currencies are strong
Q4) In what production process are materials and intermediate parts sensitive to the real exchange due to the fluctuations currency values?
A) input sourcing
B) production scheduling
C) plant location decisions
D) pricing policies
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) If a country has a capital account ________,it is ________ net foreign assets.
A) surplus, acquiring
B) deficit, losing C) surplus, losing
D) surplus, in equilibrium as far as its
Q2) All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:
A) identical nominal returns imply very different real returns for investors in different countries.
B) returns in different currencies can have different currency risk premiums.
C) political risks or the threat of capital controls prevent investors from taking advantage of higher returns in other countries.
D) PPP deviations are not sizable and prolonged.
Q3) In late December 1990,one-year German Treasury bills yielded 9.1%,whereas one-year U.S.Treasury bills yielded 6.9%.At the same time,the inflation rate during 1990 was 6.3% in the U.S.,double the German rate of 3.1%.Were these inflation and interest rates consistent with the Fisher Effect?
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Chapter 11: International Debt Financing
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Q1) Which of the following bonds is least subject to the regulations of any particular country?
A) domestic bonds
B) foreign bonds
C) domestic debentures
D) dragon bonds
Q2) What is the name given to the straight fixed-rate bond issued in one currency which pays coupon interest in that same currency,but the promised repayment of principal at maturity is denominated in another currency?
A) international bond
B) dual-currency bond
C) equity-related bond
D) foreign bond
Q3) Which of the following represent liabilities to a bank?
A) deposits it accepts from its customers and securities it buys
B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital
C) the borrowing it does in security markets and the loans it provides
D) loans to customers
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Chapter 12: International Equity Financing
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Q1) The stock markets of the least developed countries are called ________ markets.
A) emerging
B) start-up
C) frontier
D) secondary
Q2) When one corporation owns shares in another,the practice is known as ________.
A) cross-listing
B) cross-market
C) cross-holding
D) diversification
Q3) Which one of the following is one important characteristic of a private bourse?
A) Brokers are appointed by the government.
B) A single corporation acquires a monopoly over all stock market transactions.
C) It is owned and operated by a corporation founded for the purpose of trading securities.
D) Private exchanges, in many countries, do not usually compete with one another.
Q4) How have global stock markets adjusted to competitive pressure from global investors?
Q5) How are ADRs differentiated?
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Chapter 13: International Capital Market Equilibrium
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Q1) What is the name given to the variance that cannot be diversified away?
A) nonsystematic covariance
B) market covariance
C) nonsystematic variance
D) systematic variance
Q2) The capital asset pricing model was derived with simplified assumptions building on the original mean-variance optimizations analytics developed by ________.
A) Mossin
B) Sharpe
C) Lintner
D) Markowitz
Q3) The locus of the portfolios in expected return-standard deviation space that have the minimum variance for each expected return is called
A) mean-variance efficient.
B) MVE portfolio.
C) mean standard deviation frontier.
D) efficient frontier.
Q4) According to the CAPM how is the risk premium on an individual security calculated?
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Page 15
Chapter 14: Country and Political Risk
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Q1) ________ is the name given the difference between the yield on a bond issued by a developing country in a currency and the government bond yield of the country that issues the currency.
A) The banking spread
B) The country risk premium
C) The country risk rating
D) The country credit spread
Q2) Which one of the following historical events made country risk analysis an important part of international banking?
A) the 1973 oil crisis
B) the 1996 Mexican peso crisis
C) the 2006 Bolivian government's expropriation of gas fields
D) the 1980 debt crisis
Q3) The Baker Plan of 1985 is named for the U.S.________.
A) secretary of state
B) president
C) federal reserve chair
D) treasury secretary
Q4) How might a government budget deficit lead to inflation?
Q5) What are some indicators of country health?
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Chapter 15: International Capital Budgeting
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Q1) When discounting cash flows,it is important that only the ________,after-tax cash flows be used.
A) monthly
B) annual
C) incremental
D) total
Q2) Which one of the following is NOT a financial side effect to account for when developing the adjusted net present value of a project?
A) subsidized financing from governments
B) the Federal Reserve Chair announces an interest rate increase
C) the cost of issuing securities
D) the costs of financial distress
Q3) The first step in deriving an ANPV for a project is to
A) add the net present value of financial side effects.
B) add the present value of any growth options.
C) calculate the net present value of the project's cash flows.
D) determine the terminal value of the project.
Q4) Of the following which cash flow provides pure profit to the parent company: licensing agreements,royalties,and overhead allocation fees?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) Explain how to calculate the rate of return on invested capital?
Q2) The ________ is the change in a firm's future operating profit divided by its investment.
A) return on investment
B) plowback ratio
C) payout ratio
D) discount rate
Q3) What is the name given to the ratio of investment to gross cash flows?
A) payout ratio
B) retention ratio
C) plowback ratio
D) debt to equity ratio
Q4) ________ occurs when managers refuse to take on low-risk projects because too much of the value from the project would accrue to the creditors.
A) Financial distress
B) A lack of plowback
C) Cannabilization of exports
D) Underinvestment
Q6) Explain what is meant by the weighted average cost of capital? Page 18
Q5) What is the U.S.tax treatment of interest paid on a foreign currency loan?
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) When a firm is unprofitable it generates a ________ that allows it to offset the losses that were incurred against future income.
A) tax credit
B) itemized deductions
C) tax-loss carry-forward
D) a write-down
Q2) Why did Miller and Modigliani claim that hedging exchange rate risk was irrelevant to the value of the firm?
Q3) What is the name of the accounting convention that allows a firm to offset the losses that were incurred against future income rather than receive a refund of taxes paid?
A) tax credit
B) itemized deductions
C) tax-loss carry-forward
D) a write-down
Q4) What are the gains from hedging foreign exchange risk?
Q5) Why is hedging considered a cost center and not a profit center?
Q6) If a country's corporate tax rate is flat,when does it not make sense for a firm to hedge?
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Chapter 18: Financing International Trade
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Q1) With a ________,the exporter retains title and control of the goods until the importer has paid for the goods.
A) sight draft
B) time draft
C) documentary collection
D) clean bill of lading
Q2) In which of the two forms of payment does the exporter not give up control of the merchandise until paid: a documents against payment collection or a documents against acceptance collection?
Q3) When an exporter plans to sell internationally,which one of the following would be considered most often?
A) be paid as late as possible
B) be paid in advance
C) who has title to the goods
D) countries where additional legal complexities exist
Q4) What is a banker's acceptance? How is one created? Whose liability is it?
Q5) Explain the fundamental financing problem in international trade?
Q6) What is the most popular way for an exporter to finance its accounts receivable?
Q7) What are the advantages of a documentary credit to an exporter and an importer?
Page 21
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Chapter 19: Managing Net Working Capital
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Q1) What are the guidelines to use transfer pricing to shift income around the world?
Q2) When the value of a firm's current liabilities are subtracted from its stock of working capital,the resulting value is known as
A) total working capital.
B) gross working capital.
C) net working capital.
D) free working capital.
Q3) What is the name of the type of demand for money that arises because a firm may need to purchase something due to an unanticipated change in its environment?
A) transactions
B) precautionary
C) short-term
D) long-term
Q4) Why is stockpiling inventories when faced with the threat of devaluation an insufficient reason to operate the firm?
Q5) What is the impact on the firm with if it always invoices their customers in hard currencies?
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Chapter 20: Foreign Currency Futures and Options
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Q1) The exchange rate in an option contract is called the option's ________.
A) premium
B) discount
C) strike price
D) delivery price
Q2) An option that can be exercised only at maturity is known as a(n)________.
A) American option
B) European option
C) currency warrant
D) call option
Q3) Which one of the following is an example of a currency futures exchange?
A) The Chicago Board of Trade
B) The New York Stock Exchange
C) The International Monetary Market
D) The Tokyo Stock Exchange
Q4) What are you buying if you purchase a U.S.dollar European put option against the Mexican peso with a strike price of MXN10.0/$ and a maturity of July? (Assume that it is May and the spot rate is MXN10.5/$.)
Q5) What are the differences between foreign currency option contracts and forward contracts for foreign currency?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) Describe how the cash flows of swaps are similar in structure to the cash flow of bonds.
Q2) When a situation exists in which two corporations have headquarters in two different countries and each makes a loan of equivalent value to the subsidiary of the other company that operates in its country,we say ________ exists.
A) a lagging accounts receivable payment
B) a parallel loan
C) the right of offset
D) a back-to-back loan
Q3) If the world capital market were fully integrated,the incentive to swap would be ________ because ________ arbitrage opportunities would exist.
A) increased; more
B) reduced; fewer
C) increased; fewer
D) reduced; more
Q4) What are some factors that underlie the economic benefits of swaps?
Q5) Why are swap market transactions costs lower than transaction costs in the long term forward market?
Q6) Describe how a back-to-back loan is used.
Page 24
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