Deck 27: Multinational Financial Management

Question 1

If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British pound to depreciate against the U.S. dollar.

Answer 1

False

Question 2

A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

Answer 2

True

Question 3

When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency per dollar.

Answer 3

True

Question 4

Individuals and corporations buy or sell forward currencies as a means of hedging exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Question 5

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Question 6

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

Question 7

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Question 8

The Eurodollar market is essentially a long-term market; most loans and deposits have maturities of longer than one year.

Question 9

Multinational financial management requires that financial analyses consider the effects of changing currency values.

Question 10

Exchange rate quotations consist solely of direct quotations.

Question 11

Calculating a currency cross-rate involves determining the exchange rate for two currencies by using a third currency as a base.

Question 12

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations.

Question 13

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

Question 14

Legal and economic differences among countries, although important, do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Question 15

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

Question 16

Credit policy for the multinational firm is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Question 17

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

Question 18

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Question 19

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Question 20

A foreign currency will, on average, depreciate against the dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Question 21

If one U.S. dollar buys 1.64 Canadian, how many U.S. dollars can you purchase for one Canadian dollar?

A) 1.64
B) 3.28
C) 0.61
D) 1.00
E) 0.37

Question 22

In 1985, a particular Japanese imported automobile sold for 1,476,000 yen or $8,200. If the car still sells for the same amount of yen today but the current exchange rate is 144 yen per dollar, what is the car selling for today in U.S. dollars?

A) $10,250
B) $12,628
C) $ 8,200
D) $ 5,964
E) $13,525

Question 23

In Japan, 90-day securities have a 4 percent annualized return and 180-day securities have a 5 percent annualized return. In the United States, 90- day securities have a 4 percent annualized return and 180-day securities have an annualized return of 4.5 percent. All securities are of equal risk. Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most correct?

A) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
B) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
C) The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
D) Answers a and b are correct.
E) Answers b and c are correct.

Question 24

A year ago, MC Hammer Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?

A) -$240,000
B) -$ 43,200
C) $ 0
D) $ 43,200
E) $ 47,473

Question 25

Suppose that 144 yen could be purchased in the foreign exchange market for one U.S. dollars today. If the yen is expected to depreciate by 8 percent tomorrow, how many yen could one U.S. dollar buy tomorrow?

A) 155.5 yen
B) 144.0 yen
C) 72.0 yen
D) 133.5 yen
E) 78.0 yen

Question 26

Suppose exchange rates between U.S. dollars and Swiss francs is SF 1.41 = $1.00 and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros?

A) 2.27
B) 1.41
C) 1.64
D) 0.43
E) 0.86

Question 27

The cash flows relevant for the analysis of a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company and the cash flows which must remain in the foreign country.

Question 28

Which of the following statements is false?

A) Any bond sold outside the country of the borrower is called an international bond.
B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term Eurobond applies only to foreign bonds denominated in U.S. currency.
E) None of the above.

Question 29

If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

A) Appreciate against the U.S. dollar.
B) Depreciate against the U.S. dollar.
C) Remain unchanged against the U.S. dollar.
D) Appreciate against other major currencies.
E) Appreciate against the dollar and other major currencies.

Question 30

Which of the following are reasons why companies move into international operations?

A) To take advantage of lower production costs in regions of inexpensive labor.
B) To develop new markets for their finished products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) All of the above.

Question 31

Solartech Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Solartech agreed to make the bill payable in yen, thus agreeing to take on exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Solartech actually receive after it exchanged yen for U.S. dollars?

A) $1,000,000
B) $1,025,000
C) $1,075,958
D) $ 929,404
E) $ 975,610

Question 32

Multinational financial management requires that

A) The effects of changing currency values be included in financial analyses.
B) Legal and economic differences be considered in financial decisions.
C) Political risk be excluded from multinational corporate financial analyses.
D) All of the above.
E) Only a and b above.

Question 33

If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

A) 0.71
B) 1.41
C) 1.00
D) 2.81
E) 0.50

Question 34

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates of return available on U.S. money market instruments.

Question 35

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Question 36

One British pound can purchase 1.82 U.S. dollars today in the foreign exchange market and currency forecasters predict that the U.S. dollar will depreciate by 12 percent against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

A) 1.82
B) 3.64
C) 1.12
D) 2.04
E) 1.63

Question 37

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.

A) premium of 8%
B) premium of 18%
C) discount of 18%
D) discount of 8%
E) premium of 16%

Question 38

Currently, 1 British pound equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?

A) 1 British pound equals 3.2400 Swiss francs
B) 1 British pound equals 2.6244 Swiss francs
C) 1 British pound equals 1.8588 Swiss francs
D) 1 British pound equals 1.0000 Swiss francs
E) 1 British pound equals 0.3810 Swiss francs

Question 39

A foreign investor who holds tax exempt Eurobonds paying 9 percent interest is considering investing in an equivalent risk domestic bond in a country with a 28 percent withholding tax on interest paid to foreigners. If 9 percent after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide that after-tax return?

A) 9.00%
B) 10.20%
C) 11.28%
D) 12.50%
E) 13.57%

Question 40

When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.

Question 41

In the spot market, 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6 percent (and therefore have a 6-month periodic return equal to 3 percent). 6-month U.S. securities have an annualized return of 6.5 percent and a periodic return of 3.25 percent. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?

A) 1 U.S. dollar = 0.6235 Canadian. dollars
B) 1 U.S. dollar = 0.6265 Canadian. dollars
C) 1 U.S. dollar = 1.0000 Canadian. dollars
D) 1 U.S. dollar = 1.5961 Canadian. dollars
E) 1 U.S. dollar = 1.6039 Canadian. dollars

Question 42

90-day investments in Britain have a 6 percent annualized return and a 1.5 percent quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4 percent annualized return and a 1 percent quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

A) 1 pound = $1.6582
B) 1 pound = $1.8000
C) 1 pound = $0.6031
D) 1 pound = $1.0000
E) 1 pound = $0.8500

Question 43

A box of candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?

A) 1 U.S. dollar equals 0.69 Swiss francs
B) 1 U.S. dollar equals 0.85 Swiss francs
C) 1 U.S. dollar equals 1.21 Swiss francs
D) 1 U.S. dollar equals 1.29 Swiss francs
E) 1 U.S. dollar equals 1.44 Swiss francs

Question 44

Suppose a U.S. firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

A) $1,834.86
B) $7,547.17
C) $ 0
D) $5,712.31
E) $4,517.26

Question 45

A product sells for $750 in the United States. The exchange rate is such that $1 equals 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

A) 123.75 Swiss francs
B) 454.55 Swiss francs
C) 750.00 Swiss francs
D) 1,237.50 Swiss francs
E) 1,650.00 Swiss francs

Question 46

Trent Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next two years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Trent believes that there is a 50 percent chance that the gross terminal value will be only $2 million and that there is a 50 percent chance that it will be $8 million. However, the government of the host country will block 20 percent of all cash flows. Thus, cash flows that can be repatriated are 80 percent of those projected. Trent's cost of capital is 15 percent, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?

A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million

Question 47

Hockey skates sell in Canada for 105 Canadian dollars. Currently, 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

A) $ 14.79
B) $ 71.00
C) $ 74.55
D) $ 85.88
E) $147.88

Question 48

Swenser Corporation arranged a two-year, $1,000,000 loan to fund a foreign project. The loan is denominated in Mexican pesos, carries a 10 percent nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately dropped to 5.10 (pesos per dollars) before the first payment came due. The loan carried no exchange rate protection and was not hedged by Swenser in the foreign exchange market. Thus, Swenser must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Swenser end up paying on the foreign loan?

A) 10.36%
B) 17.44%
C) 21.79%
D) 11.50%
E) 20.00%

Question 49

Sunware Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved in U.S. dollars by hedging its exchange rate exposure?

A) -$396
B) -$243
C) $ 0
D) $243
E) $638

Question 50

Six months ago, a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?

A) -7.92%
B) -4.13%
C) 6.00%
D) 8.25%
E) 12.00%