Risk Management in International Finance Exam Preparation Guide
Course Introduction
This course explores the principles and practices of risk management within the context of international finance. Students will examine the types of financial risks faced by multinational corporations including currency risk, interest rate risk, credit risk, and country risk and the tools used to identify, measure, and mitigate them. Through case studies, students will learn how global financial institutions assess and manage risks related to cross-border transactions and investments, as well as regulatory and economic challenges in the international financial environment. The course also covers the use of derivatives, hedging strategies, and integrated risk management frameworks to support sound financial decision-making in a globalized world.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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21 Chapters
1584 Verified Questions
1584 Flashcards
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Chapter 1: Multinational Financial Management: An Overview
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79 Verified Questions
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Sample Questions
Q1) A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.
A)True
B)False
Answer: True
Q2) Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012. What are the expected dollar cash flows of Livingston Co.?
A)$100,000
B)$200,000
C)$160,000
D)$60,000
Answer: C
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) The primary income component in a country's current account may reflect income received due to:
A)grants.
B)direct foreign investment.
C)aid.
D)giFts.
Answer: B
Q2) ____ purchases more U.S. exports than the other countries listed here.
A)Italy
B)Spain
C)Mexico
D)Canada
Answer: D
Q3) The balance of payments is a summary of all transactions between domestic and foreign residents for a specific country over a specified period of time.
A)True
B)False
Answer: True
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Chapter 3: International Financial Markets
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101 Flashcards
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Sample Questions
Q1) Which of the following is not true with respect to spot market liquidity?
A)The more willing buyers and sellers there are, the more liquid a market is.
B)The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
C)A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.
D)If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.
Answer: D
Q2) Which of the following is not true regarding electronic communications networks (ECNs)?
A)They have a visible trading floor.
B)Trades are executed by a computer network.
C)They have been created in many countries to match orders between buyers and sellers.
D)They allow investors to place orders on their computers.
E)All of the above are true.
Answer: A
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Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.
A)exceed; shortage
B)be less than; shortage
C)exceed; surplus
D)be less than; surplus
E)be equal to; shortage
Q2) Expectations of a currency crisis may trigger actions by investors and speculators that make the crisis worse.
A)True
B)False
Q3) Which of the following events would most likely result in an appreciation of the U.S. dollar?
A)U.S. inflation is very high.
B)The Fed indicates that it will raise U.S. interest rates.
C)Future U.S. interest rates are expected to decline.
D)Japan is expected to increase interest rates in the near future.
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:
A)in the money.
B)out of the money.
C)at the money.
D)at a discount.
Q2) Due to put-call parity, we can use the same formula to price calls and puts.
A)True
B)False
Q3) Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A)Purchase a call option on francs.
B)Sell a futures contract on francs.
C)Obtain a forward contract to purchase francs forward.
D)All of the above are appropriate strategies for the scenario described.
Q4) An option writer is the seller of a call or a put option.
A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Which of the following is not a reason for devaluation of a currency?
A)high inflation.
B)to reduce balance-of-trade deficit.
C)to decrease the amount of imports.
D)high unemployment.
Q2) In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.
A)True
B)False
Q3) China's yuan is presently:
A)allowed to fluctuate freely without any central bank intervention.
B)allowed to fluctuate but with central bank intervention.
C)pegged to the dollar.
D)pegged to the euro.
Q4) Which of the following countries have not adopted the euro?
A)Germany
B)Italy
C)Switzerland
D)France
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?
A)2.0.
B)2.40.
C).80.
D).50.
E)none of the above
Q2) Which of the following is an example of triangular arbitrage initiation?
A)buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask
B)buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20
C)buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20
D)converting funds to a foreign currency and investing the funds overseas
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Given a home country and a foreign country, purchasing power parity suggests that:
A)the inflation rates of both countries will be the same.
B)the nominal interest rates of both countries will be the same.
C)A and B
D)none of the above
Q2) If purchasing power parity holds, then the Fisher effect must also hold.
A)True
B)False
Q3) 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.
Q4) Interest rate parity can only hold if purchasing power parity holds.
A)True
B)False
Page 10
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.
A)True
B)False
Q2) If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.
A)higher; buy; upward
B)higher; sell; downward
C)higher; sell; upward
D)lower; buy; upward
Q3) A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Treck Co. expects to pay 200,000 in one month for its imports from Spain. It also expects to receive 250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.
A)-$38,468
B)-$21,371
C)-$17,097
D)-$4,274
Q2) 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
Q3) A purely domestic firm is never exposed to exchange rate fluctuations.
A)True
B)False
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) A put option essentially represents two swaps of currencies: one swap at the inception of the loan contract and another swap at a specified date in the future.
A)True
B)False
Q2) If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
A)put option
B)forward
C)call option
D)none of the above
Q3) Blake Inc. needs 1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the United States at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
A)$1,000,000
B)$1,055,602
C)$1,000,830
D)$1,045,644
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) U.S. firms can attempt to hedge the translation exposure of their European subsidiaries with a forward purchase of euros.
A)True
B)False
Q2) Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than its revenue is, it could reduce economic exposure by ____. If its revenues are more sensitive than its expenses, it could reduce economic exposure by ____.
A)decreasing foreign revenues; decreasing foreign expenses
B)decreasing foreign revenues; increasing foreign expenses
C)increasing foreign revenues; decreasing foreign revenues
D)decreasing foreign expenses; increasing foreign revenues
Q3) Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows and thus includes transaction exposure.
A)True
B)False
Q4) All MNCs are subject to transaction exposure.
A)True
B)False
14
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered.
A)True
B)False
Q2) MNCs oFten attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.
A)True
B)False
Q3) According to the text, a firm may be able to achieve a "more efficient" project portfolio if it:
A)focuses solely on one product.
B)focuses solely on one location to market what it produces.
C)A and B
D)none of the above
Q4) Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project
A)positively
B)negatively
C)either positively or negatively, depending on the percentage of appreciation
D)none of the above
Q2) As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.
A)increases; decreases
B)decreases; increases
C)increases; increases
D)none of the above
Q3) ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.
A)Discriminant analysis
B)Risk-adjusted discount rate
C)Sensitivity analysis
D)Simulation
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Page 16
Chapter 15: International Corporate Governance and Control
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Sample
Questions
Q1) Which of the following would probably not cause the stock price of a foreign target to decrease?
A)Its expected cash flows decline.
B)General stock market conditions in the foreign country are deteriorating.C
C)Investors anticipate that the target will be acquired.
D)All of the above will cause the target's stock price to decrease.
Q2) 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
Q3) A previously undertaken project in a foreign country may no longer be feasible because:
A)interest rates have declined.
B)the MNC's cost of capital has decreased.
C)the host government has increased its tax rates substantially.
D)exchange rate projections have changed from a depreciation to an appreciation of the foreign currency.
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Page 17
Chapter 16: Country Risk Analysis
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Sample Questions
Q1) When a country's currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion.
A)True
B)False
Q2) If a foreign country's consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is 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 manufactures and sells products in that country.
D)develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.
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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18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) The term "local capital structure" is used in the text to represent the:
A)average capital structure of local firms where the MNC's subsidiary is based.
B)average capital structure of local firms where the MNC's parent is based.
C)capital structure of a subsidiary of a particular MNC.
D)capital structure of a particular MNC overall (including all subsidiaries).
Q2) When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.
A)True
B)False
Q3) Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.
A)True
B)False
Q4) Which of the following is not a source of equity for an MNC?
A)retained earnings
B)a global equity offering
C)a domestic equity offering
D)All of the above are sources of equity for an MNC.
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Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) If an MNC issues bonds denominated in a foreign currency and that currency depreciates against the MNC's home currency, the funds needed to make coupon payments will increase.
A)True
B)False
Q2) Floating-rate bonds are oFten issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
Q3) Even if a foreign interest rate is higher than an MNC's domestic interest rate, the financing costs of issuing a bond denominated in the foreign currency will always be lower than the financing cost of a domestic bond as long as the currency depreciates over the lifetime of the bond.
A)True
B)False
Q4) If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a bond denominated in euros, it would sell euros forward.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) Consider an exporter that sells its accounts receivables to another firm that becomes responsible for obtaining payment from the various importers. This reflects:
A)accounts receivable financing.
B)consignment.
C)factoring.
D)a letter of credit.
Q2) In a ________ or clearing-account arrangement, the delivery of products to the importer is compensated for by the exporter's buying back a certain amount of the product from the importer.
A)accounts receivable financing
B)compensation
C)counterpurchase
D)barter
Q3) ____ is(are) not a type of program offered by the Ex-Im Bank.
A)Guarantees
B)Loans
C)Currency swap insurance
D)Bank insurance
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21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) Refer to Exhibit 20-1 above. What is the effective financing rate for the MNC assuming that it borrows leu on a covered basis?
A)10 percent
B)-10 percent
C)-1 percent
D)1 percent
E)none of the above
Q2) Refer to Exhibit 20-2 above. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
A)9.03 percent
B)7.00 percent
C)10.00 percent
D)7.59 percent
E)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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Chapter 21: International Cash Management
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Sample Questions
Q1) Assume Scarlett Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 percent. At the time the loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha in one year is $.00056, the dollar amount initially invested in Zambia is $____, and $____ are paid out aFter one year.
A)1,500; 1,526
B)1,526; 1,500
C)1,500; 1,400
D)1,400; 1,500
Q2) In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time.
A)True
B)False
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
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Page 23