The commonly accepted goal of the MNC is to?

1. The commonly accepted goal of the MNC is to:
a. maximize short-term earnings.
b. maximize shareholder wealth.
c. minimize risk.
d. A and C.
e. maximize international sales.

2. For the MNC, agency costs are typically:
a. non-existent.
b. larger than agency costs of a small purely domestic Company.
c. smaller than agency costs of a small purely domestic Company.
d. the same as agency costs of a small purely domestic Company.
3. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to
____ and when foreign currencies denominating these cash flows are expected to ____.
a. decrease; appreciate
b. increase; appreciate
c. decrease; depreciate
d. increase; depreciate
4. ____ are most commonly classified as a direct foreign investment.
a. Foreign acquisitions
b. Purchases of international stocks
c. Licensing agreements
d. Exporting transactions
5. If an Australia-based MNC focused completely on exporting, then its valuation would likely be adversely
affected if most currencies were expected to appreciate against the dollar over time.
a. True
b. False
6. The least risky method by which Companies conduct international business is:
a. Franchising.
b. The acquisitions of existing operations.
c. International Trade.
d. The establishment of new subsidiaries.
e. Licensing
7. If there is suddenly more uncertainty about an MNC’s future cash flows, then investors will expect to
receive a higher rate of return.
a. True
b. False

8. Generally, Australia runs a ______ in its current account but a _____ in its capital and financial
account.
a. large surplus, large deficit
b. small surplus, small deficit
c. Surplus, deficit
d. deficit, surplus
9. The demand for Australian exports tends to increase when:
a. economic growth in foreign countries decreases.
b. the currencies of foreign countries strengthen against the dollar.
c. U.S. inflation rises.
d. none of the above.
10. Assume the Australia has a balance of trade surplus with the country of Thor. When individuals in Thor
manufacture CDs and DVDs that look almost exactly like the original product produced in the Australia
and other countries, they ____ the Australian balance of trade surplus with Thor. This activity is called
____.
a. reduce; flipping
b. reduce; pirating
c. increase; pirating
d. increase; flipping
11. A weakening of the Australian dollar with respect to the British pound would likely reduce Australian
exports to the U.K. and increase Australian imports from the U.K.
a. True
b. False
12. Which of the following is not a goal of the International Monetary Fund (IMF)?
a. To promote cooperation among countries on international monetary issues
b. To promote stability in exchange rates
c. To enhance a country’s long-term economic growth via the extension of structural
adjustment loans
d. To promote free trade
e. To promote free mobility of capital funds across countries
13. ____ is not a factor that affects the bid/ask spread.
a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread
14. The ask quote is the price for which a bank offers to sell a currency.
a. True
b. False
15. If an Australian company desires to avoid the risk from exchange rate fluctuations, and it is receiving
A$100,000 in 90 days, it could:
a. obtain a 90-day forward purchase contract on euros.
b. obtain a 90-day forward sale contract on euros.
c. purchase euros 90 days from now at the spot rate.
d. sell euros 90 days from now at the spot rate.

16. The international money market is primarily served by:
a. the governments of European countries, which directly intervene in foreign currency
markets.
b. government agencies such as the International Monetary Fund that enhance development
of countries.
c. several large banks that accept deposits and provide loans in various currencies.
d. small banks that convert foreign currency for tourists and business visitors.
17. In general, stock markets allow for more price efficiency and attract more investors when they have all
of the following except:
a. more voting rights for shareholders.
b. more legal protection.
c. more enforcement of the laws.
d. less stringent accounting requirements.
18. Assume an Australian company has to pay for Korean imports in 60 days. It expects that Korean won
will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this
situation:
a. Buy Australian dollars forward
b. Sell Australian dollars forward
c. Purchase call option
d. Purchase put option
19. Which of the following is probably not an example of the use of forward contracts by an MNC headquartered
in Australia?
a. Hedging pound payables by selling pounds forward
b. Hedging peso receivables by selling pesos forward
c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward
e. All of the above are examples of using forward contracts.
20. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency
depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z
and import ____ from Country Z.
a. more; more
b. less; less
c. more; less
d. less; more
21. If the RBA desires to weaken the Australian dollar without affecting the dollar money supply, it should:
a. exchange Australian dollars for foreign currencies, and sell some of its existing Treasury
security holdings for dollars.
b. exchange foreign currencies for Australian dollars, and sell some of its existing Treasury
security holdings for dollars.
c. exchange Australian dollars for foreign currencies, and buy existing Treasury securities with
dollars.
d. exchange foreign currencies for Australian dollars, and buy existing Treasury securities with
dollars.
22. Which of the following countries was probably the least affected (directly or indirectly) by the Asian
crisis?
a. Thailand.
b. Indonesia.
c. Russia.
d. China.
e. Malaysia.
23. Which of the following countries have not adopted the euro?
a. Germany
b. Italy
c. Switzerland
d. France
24. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may
attempt to purchase more of that currency before the peg is broken.
a. True
b. False
25. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to
the attractive foreign prices that result from a strong home currency.
a. True
b. False
26. The value of the Australian dollar (A$) today is US$0.73. Yesterday, the value of the Australian dollar
was US$0.69. The Australian dollar ____ by ____%.
a. depreciated; 5.80
b. depreciated; 4.00
c. appreciated; 5.80
d. appreciated; 4.00
27. A large increase in the income level in Indonesia along with no growth in the Australian income level is
normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in
Indonesian demand for Australian goods, and the Indonesian Rupee should ____.
a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. decrease; appreciate
28. If inflation increases substantially in Australia while New Zealand inflation remains unchanged, this is
expected to place ____ pressure on the value of the Australian dollar with respect to the New Zealand
dollar.
a. upward
b. downward
c. either upward or downward (depending on the degree of the increase in Australian inflation)
d. none of the above; there will be no impact
29. If Australia experiences a sudden surge in inflation and surge in interest rates while Japanese inflation
and interest rates remain unchanged, the value of Japanese yen will ____ against the Australian dollar.
a. appreciate
b. depreciate
c. remain unchanged
d. cannot be determined from the information provided.
30. If a country experiences an increase in interest rates relative to Australian interest rates, the inflow of
Australian funds to purchase its securities should ____, the outflow of its funds to purchase Australian
securities should ____, and there is ____ pressure on its currency’s equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward
31. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the
Australian interest rate. According to interest rate parity, the forward rate of Currency X:
a. should exhibit a discount.
b. should exhibit a premium.
c. should be zero (i.e., it should equal its spot rate).
d. B or C
32. Assume that an Australian company can invest funds for one year in the Australia at 12% or invest
funds in Mexico at 14%. The spot rate of the peso is A$.10 while the one-year forward rate of the peso
is A$.10. If the Australian company attempt to use covered interest arbitrage, what forces should
occur?
a. spot rate of peso increases; forward rate of peso decreases.
b. spot rate of peso decreases; forward rate of peso increases.
c. spot rate of peso decreases; forward rate of peso decreases.
d. spot rate of peso increases; forward rate of peso increases.
33. Assume that the Australian interest rate is 10%, while the British interest rate is 15%. If interest rate
parity exists, then:
a. British investors who invest in the United Kingdom will achieve the same return as
Australian investors who invest in Australia
b. Australian investors will earn a higher rate of return when using covered interest arbitrage
than what they would earn in Australia
c. Australian investors will earn 15% whether they use covered interest arbitrage or invest in
Australia
d. Australian investors will earn 10% whether they use covered interest arbitrage or invest in
Australia
34. Subsidiary A of Mega Corporation has net inflows in Singapore dollars of SG$1,000,000, while
Subsidiary B has net outflows in Singapore dollars of SG$1,500,000. The expected exchange rate of
the Singapore dollar is A$.55. What is the net inflow or outflow as measured in Australian dollars?
a. A$500,000 outflow.
b. A$500,000 inflow.
c. A$275,000 inflow.
d. A$275,000 outflow.

35. To hedge a contingent exposure, in which an MNC’s exposure is contingent on a specific event
occurring, the appropriate hedge would be a(n) ____ hedge.
a. money market
b. futures
c. forward
d. options
36. Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in Australian $ = A$.32
Exchange rate of pound in Australian $ = A$1.50
Exchange rate of pound in Singapore dollars = S$4.50
Based on the information given, as you and others perform triangular arbitrage, what should logically
happen to the spot exchange rates?
a. The Singapore dollar value in Australian dollars should appreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
depreciate.
b. The Singapore dollar value in Australian dollars should depreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
depreciate.
c. The Singapore dollar value in Australian dollars should depreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
appreciate.
d. The Singapore dollar value in Australian dollars should appreciate, the pound value in
Australian dollars should depreciate, and the pound value in Singapore dollars should
appreciate.
37. Bank A quotes a bid rate of A$.300 and an ask rate of A$.305 for the Malaysian ringgit (MYR). Bank B
quotes a bid rate of A$.306 and an ask rate of A$.310 for the ringgit. What will be the profit for an
investor who has A$500,000 available to conduct locational arbitrage?
a. A$2,041,667.
b. A$9,804.
c. A$500.
d. A$1,639.
38. The interest rate on yen is 7%. The interest rate in Australia is 9%. The yen’s forward rate should
exhibit a premium of about 2%.
a. True
b. False
ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application
39. Kalons, Inc. is a Australian-based MNC that frequently imports raw materials from Canada. Kalons is
typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will
appreciate in the near future. Which of the following is not an appropriate hedging technique under
these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts.
c. purchase Canadian dollar put options.
d. purchase Canadian dollar call options.
40. Thornton, Inc. an Australian company needs to invest five million Nepalese rupees in its Nepalese
subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one
year. Thornton would like to engage in a swap transaction. Thus, Thornton would:
a. convert the rupees to Australian dollars in the spot market today and convert rupees to
Australian dollars in one year at today’s forward rate.
b. convert the Australian dollars to rupees in the spot market today and convert dollars to
rupees in one year at the prevailing spot rate.
c. convert the Australian dollars to rupees in the spot market today and convert rupees to
Australian dollars in one year at today’s forward rate.
d. convert the Australian dollars to rupees in the spot market today and convert rupees to
Australian dollars in one year at the prevailing spot rate.
41. Which of the following is the most unlikely strategy for an Australian company that will be purchasing
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. obtain a forward contract to purchase francs forward.
c. sell a futures contract on francs.
d. all of the above are appropriate strategies for the scenario described.
42. A firm sells a currency futures contract, and then decides before the settlement date that it no longer
wants to maintain such a position. It can close out its position by:
a. buying an identical futures contract.
b. selling an identical futures contract.
c. buying a futures contract with a different settlement date.
d. selling a futures contract for a different amount of currency.
e. purchasing a put option contract in the same currency.
43. Malabo Corporation is an Australian company that invoices some of its exports in Japanese yen. If it
expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.
a. sell yen put options
b. buy yen call options
c. buy futures contracts on yen
d. sell futures contracts on yen
44. A call option premium has a lower bound that is equal to the greater of zero and the difference between
the underlying ____ prices. The upper bound of a call option premium is the ____ price.
a. spot and exercise; exercise
b. spot and exercise; spot
c. exercise and spot; exercise
d. exercise and spot; spot
45. Margin requirements are deposits placed by investors in futures contracts with their respective
brokerage firms when they take their position. They are intended to minimize credit risk associated with
futures contracts.
a. True
b. False
46. The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be.
a. higher; less
b. higher; more
c. lower; less
d. lower; more
47. Which of the following would result in a profit of a futures contract when the underlying currency
depreciates?
a. Buy a futures contract; sell a futures contract after the currency has depreciated
b. Sell a futures contract; buy a futures contract after the currency has depreciated
c. Buy a futures contract; buy an additional futures contract after the currency has depreciated
d. None of the above would result in a profit when the underlying currency of the futures
contract depreciates.
48. Translation exposure reflects:
a. the exposure of a company’s international contractual transactions to exchange rate
fluctuations.
b. the exposure of a company’s local currency value to transactions between foreign exchange
traders.
c. the exposure of a company’s financial statements to exchange rate fluctuations.
d. the exposure of a company’s cash flows to exchange rate fluctuations.
49. Which of the following operations benefits from appreciation of the company’s local currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior to the
appreciation.
b. receiving earnings dividends from foreign subsidiaries.
c. purchasing supplies locally rather than overseas.
d. exporting to foreign countries.
50. Magent Co. is an Australian company that has exposure to the Swiss francs (SF) and Danish kroner
(DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate
of the SF is about A$.40 while the present exchange rate of the DK is A$.10. Magent Co. has not
hedged these positions. The SF and DK are highly correlated in their movements against the Australian
dollar. If the Australian dollar weakens, then Magent Co. will:
a. benefit, because the dollar value of its SF position exceeds the Australian dollar value of its
DK position.
b. benefit, because the dollar value of its DK position exceeds the Australian dollar value of its
SF position.
c. be adversely affected, because the dollar value of its SF position exceeds the Australian
dollar value of its DK position.
d. be adversely affected, because the dollar value of its DK position exceeds the Australian
dollar value of its SF position.
51. A company produces goods for which substitute goods are produced in all countries. Depreciation of
the company ‘s local currency should:
a. decrease local sales as foreign competition in local markets is reduced.
b. decrease the company ‘s exports denominated in the local currency.
c. decrease the returns earned on the company ‘s foreign bank deposits.
d. decrease the company ‘s cash outflow required to pay for imported supplies denominated in
a foreign currency.
e. none of the above
52. Which of the following is not a form of exposure to exchange rate fluctuations?
a. transaction exposure.
b. credit exposure.
c. economic exposure.
d. translation exposure.
53. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another
currency, then the MNCs’ transaction exposure is ____ if the two currencies are ____ correlated.
a. high; positively
b. low; negatively
c. high; negatively
d. none of the above
54. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the
spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a
discount.
d. zero.
55. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese
yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time
payment arrives, the most appropriate hedge would be:
a. a money market hedge.
b. a forward sale of yen.
c. purchasing yen call options.
d. purchasing yen put options.
e. selling yen put options.
56. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is
A$.80. If you use a forward hedge, you will:
a. receive A$750,000 today.
b. receive A$750,000 in 90 days.
c. pay A$750,000 in 90 days.
d. receive A$480,000 today.
e. receive A$480,000 in 90 days.
57. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the
same result as the ____ hedge.
a. put option
b. forward
c. call option
d. none of the above
58. When a perfect hedge is not available to eliminate transaction exposure, the company may consider
methods to at least reduce exposure, such as ____.
a. leading
b. lagging
c. cross-hedging
d. currency diversification
e. all of the above
59. A futures hedge involves taking a money market position to cover a future payables or receivables
position.
a. True
b. False
60. You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables
of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of A$.01 per
unit and an exercise price of A$.01031 per Japanese yen. The forecasted spot rate of the Japanese
yen in 90 days is:
Future Spot Rate Probability
A$.01035 20%
A$.01032 20%
A$.01030 30%
A$.01029 30%
The 90-day forward rate of the Japanese yen is A$.01033.
What is the probability that the call option will be exercised (assuming Montana purchased it)?
a. 30%
b. 60%
c. 20%
d. 40%
61. FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call
option with an exercise price of A$0.75 and a premium of A$0.01 is available. Also, a 90-day put option
with an exercise price of A$0.73 and a premium of A$0.01 is available. FAI plans to purchase options to
hedge its receivable position. Assuming that the spot rate in 90 days is A$0.71, what is the net amount
received from the currency option hedge?
a. A$219,000
b. A$222,000
c. A$216,000
d. A$213,000
62. The ____ a project’s variability in 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
63. Consider Company A and Company B that both produce the same product. Company 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
64. Consider a country that presently has a high level of unemployment because of weak economic
conditions. Its income levels are very low. This country may be an attractive target as a result of ____
motives by Australian companies that engage in direct foreign investment.
a. revenue-related
b. cost-related
c. A and B
d. none of the above
65. Which of the following is not true regarding the efficient frontier considered by MNCs?
a. There is exactly one point on the efficient frontier that is optimal for every MNC, regardless
of its degree of risk aversion.
b. The efficient frontier for international projects will probably lie to the left of the efficient
frontier for domestic projects.
c. Each point on the efficient frontier represents a portfolio of projects as opposed to an
individual project.
d. All of the above are true.
e. A and C are false.
66. To fully benefit from economies of scale, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other
operations.
67. The best means of using direct foreign investment (DFI) to fully benefit from cheap foreign factors of
production is probably to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary in a new market that can sell products produced elsewhere; this
allows for increased production and possibly greater production efficiency.
c. establish a subsidiary in a market that has relatively low costs of labor and land; sell the
finished product to countries where the cost of production is higher.
d. establish a subsidiary in a market in which raw materials are cheap and accessible; sell the
finished product to countries in which the raw materials are more expensive.
68. If an Australian parent is setting up a French subsidiary, and funds from the subsidiary will be
periodically sent to the parent, the ideal situation from the parent’s perspective is a ____ after the
subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
d. B and C are both ideal.
69. Other things being equal, companies from a particular home country will engage in more international
acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of
capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low
70. An international project’s NPV is ____ related to the size of the initial investment and ____ related to
the project’s required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively
71. Which of the following is not true regarding simulation?
a. It can be used to generate a probability distribution of NPVs.
b. It generates a probability distribution of NPVs by randomly drawing values for the input
variable(s).
c. It can only be used for one variable at a time.
d. It can be used to develop probability distributions of all variables with uncertain future
values.
72. 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.
73. An argument for MNCs to have a debt-intensive capital structure is:
a. they are well diversified.
b. they can reduce the chance of bankruptcy.
c. it spreads the shareholder base.
d. it forces subsidiaries to pay dividends to shareholders.
74. The capital asset pricing theory is based on the premise that:
a. only unsystematic variability in cash flows is relevant.
b. only systematic variability in cash flows is relevant.
c. both systematic and unsystematic variability in cash flows are relevant.
d. neither systematic nor unsystematic variability in cash flows is relevant.
75. One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of
interests between the MNC’s ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors
76. According to the text, the cost of debt:
a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.
77. The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local companies where the MNC’s subsidiary is based.
b. average capital structure of local companies 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).
78. The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local companies where the MNC’s subsidiary is based.
b. average capital structure of local companies 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).
79. Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
a. lower than its cost of equity.
b. higher than its cost of equity.
c. lower than the country’s risk-free rate.
d. lower than its credit risk premium.
80. Assume a subsidiary is forced to borrow in excess of the MNC’s optimal capital structure. Also assume
that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the
cost of capital for the MNC overall could not have changed.
a. True
b. False
81. If an MNC financed 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.
82. A currency swap between two companies of different countries enables the exchange of ____ for ____
at periodic intervals.
a. stock; one currency
b. stock; a portfolio of foreign currencies
c. one currency; stock options
d. one currency; another currency
83. An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for
short-term debt than for long-term debt. The yield curve in this country reflects ____.
a. higher; several periods
b. lower; several periods
c. higher; a specific point in time
d. lower; a specific point in time
84. Generally, the financing costs associated with a foreign currency-denominated bond will be ____
volatile than the financing costs of a domestic bond because of ____.
a. more; exchange rate movements
b. less; exchange rate movements
c. less; global economic conditions
d. none of the above
85. A much higher level of service may be offered to its clients when the bank operates a
__________office. The _________works like a local bank and provides a wide range of services.
a. foreign branch; foreign branch
b. subsidiary banks; subsidiary banks
c. representative office; representative office
d. correspondent banking; correspondent banking
86. One of the key differences between conventional banks and Islamic banks is______________.
a. funding by interest-bearing accounts and profit-sharing investments
b. funding by non-interest-bearing current accounts and loss-ignoring investments
c. funding by non-interest-bearing current accounts and profit-sharing investments
d. None of the above.
87. Cryptocurrencies rely on the transmission of digital information employing cryptographic methods to
authenticate legitimate transactions.
a. True
b. False
88. Which of the following is a reason why commercial banks can facilitate international trade?
a. The local / foreign exporter may not wish to accept credit risk of the importer.
b. The local government may impose exchange contracts that prevent payment by the
importer to the exporter.
c. The local / foreign exporter may need financing until payment for the goods is received.
d. All of the above
89. MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash.
a. factoring
b. a bill of lading
c. a banker’s acceptance
d. a letter of credit
90. An exchange of goods between two parties under two distinct contracts expressed in monetary terms
is:
a. compensation.
b. counterpurchase.
c. factoring.
d. accounts receivable financing.
91. Under a letter of credit arrangement, the bank issuing the letter of credit is known as the ____ bank, the
correspondent bank in the beneficiary’s country to which the issuing bank sends the letter of credit is
known as the ____ bank, and the bank that agrees to examine documents under the letter of credit and
pay the beneficiary is called the ____ bank.
a. issuing; negotiating; advising
b. issuing; advising; negotiating
c. advising; issuing; negotiating
d. negotiating; issuing; advising
e. advising; negotiating; issuing
92. The risk to the exporter is highest with the ____ method.
a. prepayment
b. letter of credit
c. consignment
d. open account
93. A letter of credit guarantee that the goods purchased will be those invoiced and shipped.
a. True
b. False
94. Which of the following is not a trade financing method used in international trade from an exporter’s
perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account
95. Which of the following risks an international bank do not face
a. strategic risk.
b. systemic risk.
c. company-specific risk.
d. A and C.
e. Banks with international operations are subject to all of these risks.
96. Which of the following is a probable channel through which Brexit-related changes could affect the UK
financial sector
a. bank operating costs could increase due to duplication of facilities in the United Kingdom
and the European Union
b. changes in the financial services ‘rulebook’ could impact the sector
c. there could be a macroeconomic impact
d. All of the above
97. According to text, which of the following market function will be unaffected from the Impact of Brexit on
UK’s financial sector
a. Reinsurance
b. Marine insurance
c. European equity trading
d. All of the above market function will be affected
98. If Brexit is implemented, Foreign exchange trading will not be directly impacted by a change in the
EU/UK relationship.
a. True
b. False
99. Bankers have developed various sophisticated methods to assess and manage this market risk. Two
commonly used methods are the VaR method and stress testing.
a. True
b. False
100. Unlike other countries such as the United Kingdom and the United States, there was no injection of
public funds into Australian bank capital.
a. True
b. False
101. To force the value of the pound to appreciate against the Australian dollar, the Reserve Bank of
Australia (RBA) should:
a. sell Australian dollars for pounds in the foreign exchange market and the European Central
Bank (ECB) should sell Australian dollars for pounds in the foreign exchange market.
b. sell pounds for Australian dollars in the foreign exchange market and the European Central
Bank (ECB) should sell Australian dollars for pounds in the foreign exchange market.
c. sell pounds for Australian dollars in the foreign exchange market and the European Central
Bank (ECB) should not intervene.
d. sell Australian dollars for pounds in the foreign exchange market and the European Central
Bank (ECB) should sell pounds for Australian dollars in the foreign exchange market.
102. A weak Australian dollar is normally expected to cause:
a. high unemployment and high inflation in Australia
b. high unemployment and low inflation in Australia
c. low unemployment and low inflation in Australia
d. low unemployment and high inflation in Australia
103. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is
downward pressure on the local currency of that country.
a. True
b. False
104. Which one of the following is a disadvantage of a fixed exchange rate system:
a. Importing companies are insulated from the risk that the currency will appreciate over time.
b. Management of an MNC is less difficult.
c. Australian government might change the value of the currency.
d. Exporting countries are insulated from the risk that the currency will depreciate over time.
105. Among the reasons for RBA intervention are:
a. to smooth exchange rate movement.
b. to establish implicit exchange rate boundaries.
c. to respond to temporary disturbances.
d. all of the above
106. Assume no transactions costs exist for any futures or forward contracts. The price of British pound
futures against Australian dollar with a settlement date 180 days from now will:
a. definitely be above the 180-day forward rate.
b. definitely be below the 180-day forward rate.
c. be about the same as the 180-day forward rate.
d. none of the above; there is no relation between the futures and forward prices.
107. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an
exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate
of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:
a. $.08.
b. $.03.
c. $.05.
d. $.08.
e. none of the above
108. Johnson, Inc., An Australian company MNC, will need 10 million Thai baht on August 1. It is now May 1.
Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the
baht’s closing exchange rate (in A$) quoted by Thailand’s central bank in 90 days. The baht’s spot rate
today is A$.02. If the rate quoted by Thailand’s central bank on August 1 is A$.022, Johnson will ____
A$____.
a. pay; 20,000
b. be paid; 20,000
c. pay; 2,000
d. be paid; 2,000
e. none of the above
109. The premium on a pound put option is A$.04. The spot rate and the exercise price is A$1.52. The spot
rate at the time of this option expiration is expected to be A$1.51. The speculators could profit by:
a. writing a put option.
b. buying a put option.
c. buying a call option
d. writing a call option and buying a call option simultaneously.
111. Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in Australian $ = A$.60
Exchange rate of pound in Australian $ = A$1.50
Exchange rate of pound in Singapore dollars = S$2.6
Based on the information given, as you and others perform triangular arbitrage, what should logically
happen to the spot exchange rates?
a. The Singapore dollar value in Australian dollars should appreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
depreciate.
b. The Singapore dollar value in Australian dollars should depreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
depreciate.
c. The Singapore dollar value in Australian dollars should depreciate, the pound value in
Australian dollars should appreciate, and the pound value in Singapore dollars should
appreciate.
d. The Singapore dollar value in Australian dollars should appreciate, the pound value in
Australian dollars should depreciate, and the pound value in Singapore dollars should
appreciate.
112. Assume that interest rate parity holds. Australian interest rate is 13% and British interest rate is 10%.
The forward rate on British pounds exhibits a ____ of ____ percent.
a. discount; 2.73
b. premium; 2.73
c. discount; 3.65
d. premium; 3.65
113. Commonwealth Bank of Australia (CBA) quotes a bid rate of A$0.026 and an ask rate of A$0.028 for
the Indian rupee (INR); National Australia Bank (NAB) quotes a bid rate of A$0.024 and an ask rate for
A$0.025. Locational arbitrage would involve:
a. buying rupees from CBA at the bid rate and selling them to NAB at the ask rate.
b. buying rupees from NAB at the ask rate and selling them to CBA at the bid rate.
c. buying rupees from CBA at the ask rate and selling to NAB at the bid rate.
d. buying rupees from NAB at the bid rate and selling them to CBA at the ask rate.
e. Locational arbitrage is not possible in this case.
114. Which of the following is not true regarding interest rate parity (IRP)?
a. When interest rate parity holds, covered interest arbitrage is not possible.
b. When the interest rate in the foreign country is higher than that in the home country, the
forward rate of that country’s currency should exhibit a discount.
c. When the interest rate in the foreign country is lower than that in the home country, the
forward rate of that country’s currency should exhibit a premium.
d. When covered interest arbitrage is not feasible, interest rate parity must hold.
e. All of the above are true.
115. Assume that Swiss investors have francs available to invest in securities, and they initially view
Australian and British interest rates as equally attractive. Now assume that Australian interest rates
increase while British interest rates stay the same. This would likely cause:
a. the Swiss demand for Australian dollars to decrease and the Australian dollar will
depreciate against the pound.
b. the Swiss demand for Australian dollars to increase and the Australian dollar will depreciate
against the Swiss franc.
c. the Swiss demand for Australian dollars to increase and the Australian dollar will appreciate
against the Swiss franc.
d. the Swiss demand for Australian dollars to decrease and the Australian dollar will
appreciate against the pound.
116. The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements.
b. income growth.
c. inflation.
d. government controls.
e. none of the above
117. The phrase “the Australian dollar was mixed in trading” means that:
a. the Australian dollar was strong in some periods and weak in other periods over the last
month.
b. the volume of trading was very high in some periods and low in other periods.
c. the Australian dollar was involved in some currency transactions, but not others.
d. the Australian dollar strengthened against some currencies and weakened against others.
118. Assume that Australia places a strict quota on goods imported from Indonesia and that Indonesia does
not retaliate. Holding other factors constant, this event should immediately cause the Australian
demand for Indonesia rupees to ____ and the value of the rupees to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase
119. If a country experiences an increase in interest rates relative to Australian interest rates, the inflow of
Australian funds to purchase its securities should ____, the outflow of its funds to purchase Australian
securities should ____, and there is ____ pressure on its currency’s equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward
120. Assume that the income levels in U.K. start to rise, while Australian income levels remain unchanged.
This will place ____ pressure on the value of British pound. Also, assume that Australian interest rates
rise, while the British pound remains unchanged. This will place ____ pressure on the value of British
pound.
a. downward; downward
b. upward; downward
c. upward; upward
d. downward; upward
121. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to
appreciate substantially over time. Assuming the company is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.
122. FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call
option with an exercise price of A$0.75 and a premium of A$0.01 is available. Also, a 90-day put option
with an exercise price of A$0.73 and a premium of A$0.01 is available. FAI plans to purchase options to
hedge its receivable position. Assuming that the spot rate in 90 days is A$0.71, what is the net amount
received from the currency option hedge?
a. A$219,000
b. A$222,000
c. A$216,000
d. A$213,000
123. One argument for exchange rate irrelevance is that:
a. MNCs can hedge exchange rate exposure much more effectively than individual investors.
b. investors can invest in a diversified stock portfolio of MNCs that have different exposures to
exchange rates.
c. purchasing power parity does not hold very well.
d. MNCs are typically not diversified across numerous countries.
124. In general, a company that concentrates on local sales, has very little foreign competition, and obtains
foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.
a. be hurt by; appreciated
b. benefit from; depreciated
c. be hurt by; depreciated
d. none of the above
125. Vada, Inc. exports computers to New Zealand invoiced in Australian dollars. Its main competitor is
located in Japan. Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.
126. Lampon Co. is an Australian company 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 Australian dollars. Assume, the Hong Kong dollar is pegged to the
Australian dollar. If the Japanese yen appreciates against the Australian 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
127. Which of the following is not true regarding currency correlations?
a. Two highly positively correlated currencies act almost as if they are the same currency.
b. If two inflow currencies are highly positively correlated transaction exposure is somewhat
offset.
c. If two inflow currencies are negatively correlated transaction exposure is somewhat offset.
d. If two currencies, one an inflow currency and the other an outflow currency, are highly
positively correlated, transaction exposure is somewhat offset.
128. Other things being equal, companies from a particular home country will engage in more international
acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of
capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low
129. One foreign project in Hungary and another in Japan had the same perceived value from the Australian
parent’s perspective. Then, the exchange rate expectations were revised, upward for the value of the
Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in
Japan would now be ____ from the parent’s perspective.
a. negative
b. higher than that for the Hungarian project
c. lower than that for the Hungarian project
d. the same as that for the Hungarian project
e. A and C
130. Which of the following is not a characteristic of a country to be considered within an MNC’s international
tax assessment?
a. corporate income taxes.
b. withholding taxes.
c. provisions for carrybacks and carryforwards.
d. tax treaties.
e. all of the above are characteristics to be considered.
131. Which of the following is not true regarding simulation?
a. It can be used to generate a probability distribution of NPVs.
b. It generates a probability distribution of NPVs by randomly drawing values for the input
variable(s).
c. It can only be used for one variable at a time.
d. It can be used to develop probability distributions of all variables with uncertain future
values.
132. A country with high unemployment could best increase its employment by:
a. encouraging foreign companies to establish subsidiaries that produce the same products
local companies produce.
b. encouraging foreign companies to establish licensing arrangements for products local
companies produce.
c. encouraging foreign companies to establish subsidiaries that produce products local
companies do not produce.
d. none of the above would reduce employment.
133. To use foreign factors of production, an MNC should:
a. establish a subsidiary in a new market that can sell products produced elsewhere.
b. establish a subsidiary in a market that has relatively low costs of labor or land.
c. establish a subsidiary in a market where raw materials are cheap and accessible.
d. participate in a joint venture in order to learn about a production process or other
operations.
134. To diversify internationally for the purpose of reducing risk, which strategy is appropriate?
a. Establish subsidiaries in markets whose business cycles are the same as those where
existing subsidiaries are based.
b. Establish a subsidiary in a market that has relatively low cost of labor or land.
c. Establish a subsidiary in a market where the local currency is weak but is expected to
appreciate over time.
d. Establish subsidiaries in markets whose business cycles differ from those where existing
subsidiaries are based.
135. ____ is not a cost-related motive for direct foreign investment (DFI).
a. Using foreign factors of production
b. Using foreign raw materials
c. Using foreign technology
d. Reacting to trade restrictions
e. Fully benefiting from economies of scale
136. The ____ the correlation in project returns is over time, the ____ will be the project portfolio risk as
measured by the portfolio variance.
a. lower; lower
b. higher; lower
c. lower; higher
d. none of the above
137. The yields offered on newly issued bonds tend to be:
a. lower in less developed countries where labor costs are low.
b. relatively high in countries such as Japan and the Australian because the credit risk
premium is much higher there than in other countries.
c. the same across countries at a give point in time.
d. none of the above
138. When a AUSTRALIA-based MNC has a subsidiary in Mexico that needs financing, the MNC’s exposure
to exchange rate risk can be minimized if:
a. the parent issues dollar-denominated equity and provides the proceeds to the subsidiary.
b. the parent provides its retained earnings to the Mexican subsidiary.
c. the subsidiary obtains a dollar-denominated loan from a financial institution.
d. the subsidiary obtains a peso-denominated loan from a financial institution.
139. An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for
short-term debt than for long-term debt. The yield curve in this country reflects ____.
a. higher; several periods
b. lower; several periods
c. higher; a specific point in time
d. lower; a specific point in time
140. Generally, the financing costs associated with a foreign currency-denominated bond will be ____
volatile than the financing costs of a domestic bond because of ____.
a. more; exchange rate movements
b. less; exchange rate movements
c. less; global economic conditions
d. none of the above
141. One argument for why subsidiaries should be only partly-owned 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 motivate subsidiary managers by allowing them partial ownership.
142. The term “global capital structure” is used in the text to represent the:
a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic companies across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).
143. Which of the following is not a reason provided in the text regarding why the cost of debt can vary
across countries?
a. differences in the risk-free rate.
b. a high price-earnings multiple.
c. differences in the credit risk premium.
d. differences in demographics.
144. Most MNCs obtain equity funding:
a. in foreign countries.
b. in their home country.
c. through global offerings.
d. through private placements.
145. The central bank – the Reserve Bank of Australia – has delegated prudential supervision of banks
to_______, which makes and enforces the rules governing the capital adequacy of Australian banks.
a. Australian Prudential Regulatory Authority (APRA)
b. Australian Prudential Banking Authority (APBA)
c. Australian Prudential Capital Adequacy Authority (APCAA)
d. None of the above
146. Consider an Australian exporter that sells its accounts receivables off to another company that
becomes responsible for obtaining cash from the various importers. This reflects:
a. accounts receivable financing.
b. consignment.
c. factoring.
d. a letter of credit.
147. Under a ____, the exporter is paid once shipment has been made and the draft is presented to the
buyer for payment; under a ____, the exporter provides instructions to the buyer’s bank to release
shipping documents against acceptance, by the buyer, of the draft.
a. sight draft; time draft
b. sight draft; banker’s acceptance
c. bill of lading; banker’s acceptance
d. time draft; sight draft
148. The Arabic terminology of ‘Islamic law’ and ‘interest’ are ______ law and______ respectively.
a. riba; sharia
b. sharia; maysir
c. gharar; mysir
d. sharia; riba
149. Agency contracts in Islamic finance is tremed as __________and are generally used for money market
transactions.
a. musharakah
b. wadi’ah
c. mudarabah
d. wakalah
150. A _________ is a virtual coinage system that operates like a standard currency but without a central
trusted authority, and which permits users to make virtual payments for goods and services.
a. eurocurrency
b. cryptocurrency
c. hyper-currency
d. avatar currency

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