Deck 17: Multinational Financial Management

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Exchange rate quotations consist solely of direct quotations.

Question 11

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

Question 12

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Question 13

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

Question 14

Credit policy for multinational firms 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 15

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

Question 16

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 17

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 18

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

Question 19

If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S. dollar.

Question 20

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

Question 21

Suppose that 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 22

Suppose the exchange rate 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) 0.43
B) 0.86
C) 1.41
D) 1.64
E) 2.27

Question 23

Suppose DeGraw 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, DeGraw agreed to make the bill payable in yen, thus agreeing to take some 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 DeGraw actually receive after it exchanged yen for U.S. dollars?

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

Question 24

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

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

Question 25

Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. 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 26

Which of the following statements is NOT CORRECT?

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) A foreign bond might pay a higher nominal interest rate than a U.S. bond.

Question 27

Which of the following is NOT a reason why companies move into international operations?

A) To take advantage of lower production costs in regions where labor costs are relatively low.
B) To develop new markets for the firm's products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) To increase their inventory levels.

Question 28

Stover 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 or lost in U.S. dollars by hedging its exchange rate exposure?

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

Question 29

The cash flows relevant for 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 plus the cash flows that must remain in the foreign country.

Question 30

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

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

Question 31

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

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

Question 32

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% 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 = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031

Question 33

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 34

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and 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) The spot rate equals the 90-day forward rate.
E) The spot rate equals the 180-day forward rate.

Question 35

Chen 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 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be
$8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 15%, 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 36

Blenman Corporation, based in the United States, arranged a 2-year,
$1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was
5)75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Blenman 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 Blenman end up paying on the loan?

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

Question 37

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

Question 38

Suppose 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 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

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

Question 39

Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

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