Deck 6: The International Monetary Environment and Financial Management in the Global Firm

Question 1

The foreign-exchange market has locations in Switzerland, Japan, and the United States.

Answer 1

False

Question 2

An increase in a nation's rate of inflation leads to an oversupply of money and eventually to a decrease in the value of the nation's currency.

Answer 2

True

Question 3

The Bretton Woods Agreement was enacted in the late 1960s when the U.S. needed to finance government programs and the Vietnam War.

Answer 3

False

Question 4

The primary players in the global financial system include governmental and nongovernmental finance departments and ministries, stock exchanges, commercial banks, the Bank for International Settlements, the World Bank, and the International Monetary Fund.

Question 5

The IMF's primarily criticized for requiring nations to undertake painful reforms.

Question 6

International financial managers are responsible for acquiring and allocating financial resources and for determining the long-term financial strategy of a firm's global operations.

Question 7

The NYSE Euronext and the NASDAQ Stock Market are the largest stock exchanges in the world.

Question 8

Unlike exporters and licensors, who both face currency risk, managers of foreign investment portfolios are sheltered from the rise and fall of exchange rates.

Question 9

The price of one currency expressed in terms of another is known as which of the following?

A) dollarization
B) monetization
C) common factor
D) exchange rate

Question 10

A U.S. company that buys from a supplier whose currency is increasing against the dollar will most likely have to do which of the following if the price is expressed in the supplier's currency?

A) pay less in dollars than originally expected
B) pay more in dollars than originally expected
C) pay the same amount of dollars as originally expected
D) pay part of the transaction in the supplier's currency

Question 11

The type of currency used only for domestic business transactions is known by which of the following terms?

A) hard
B) convertible
C) nonconvertible
D) local

Question 12

If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely not occur?

A) European firms pay more for raw materials imported from the United States.
B) European consumers purchase fewer U.S. products and services.
C) Fewer Europeans travel to the U.S. or study at U.S. universities.
D) European firms lower their prices on goods made with U.S. parts.

Question 13

If the supply of a currency rises, which of the following is most likely to be true regarding the currency's price?

A) The price of the currency fluctuates randomly.
B) The price of the currency stays the same.
C) The price of the currency lowers.
D) The price of the currency increases.

Question 14

What does the central bank do in order to accommodate a nation's economic growth?

A) regulate foreign direct investment
B) increase the nation's money supply
C) decrease the nation's money supply
D) establish national currency rates

Question 15

A trade surplus occurs as a result of which of the following?

A) a steep national currency depreciation
B) an imbalance in currency exchange rates
C) a nation's imports exceed its exports
D) a nation's exports exceed its imports

Question 16

Each of the following characterizes the floating exchange rate system except ________.

A) utilization by most advanced economies
B) rates based on supply and demand forces
C) governments refraining from systematic intervention
D) allowances for monetary policy flexibility

Question 17

Which of the following best describes the role that the international monetary system plays with foreign firms?

A) sets international currency exchange rates
B) establishes regulations for FDI financing
C) oversees finance and trade in developing nations
D) guides monetary and foreign exchange activities worldwide

Question 18

On which of the following levels of the international monetary and financial systems pyramid are commercial banks categorized?

A) national government level
B) national infrastructures level
C) international organization level
D) firm level

Question 19

Any currency deposited in a bank outside its origin country is called ________.

A) exchange currency
B) Eurocurrency
C) Ex-IM currency
D) market rate currency

Question 20

Multilateral netting would enable an MNE with numerous subsidiaries to do which of the following?

A) consolidate intracorporate cash transfers and reduce transaction fees
B) pool surplus funds in a centralized location for investment purposes
C) transfer goods and services within the firm without paying host-country taxes
D) channel funds from small subsidiaries to large ones without paying interest

Question 21

Capital budgeting is intended to do which of the following?

A) assist financial managers with balancing income and expenses
B) help firms determine the most profitable global expansion project
C) allow firms to minimize overhead expenses for global projects
D) eliminate the need for international accounting experts

Question 22

Which of the following is the purpose of a forward contract?

A) reduce corporate exposure to tax audits
B) minimize exposure to foreign inflation
C) minimize the risk of exchange rate fluctuations
D) profit from foreign based manufacturing

Question 23

When an American tourist exchanges dollars for yen at a Tokyo bank, which of the following is most likely applied?

A) the forward rate
B) the spot rate
C) the currency rate
D) the rate of spread

Question 24

Plas-Tex Exporting
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.

-Which of the following questions would be more important for Chisholm to evaluate before presenting his manufacturing recommendations to shareholders?

A) What was the impact of the exchange rate on European exports last year?
B) What is the currency risk of exporting additional Plas-Tex products to Europe?
C) How effective has the Plas-Tex marketing campaign been in Europe?
D) What was the impact on Plas-Tex sales when the euro depreciated last year?

Question 25

Plas-Tex Exporting
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.

-Which of the following supports maintaining the current production status instead of increasing production?

A) The euro-dollar exchange rate is unpredictable due to its constant fluctuation.
B) Exporters and importers typically profit from currency speculation.
C) The euro/dollar exchange rate usually remains steady for long periods of time.
D) The cost of living in the U.S. has risen dramatically in the last year.

Question 26

Financing Corporate Expansion
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand the Chinese facility to accommodate increased demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.

-Which of the following questions would be more important for Intensity financial managers to evaluate when deciding the best method for the firm to raise funds?

A) What percentage of stock is owned by the CEO of Intensity Games?
B) How will Intensity finance expansion of its Russian facility in five years?
C) What type of debt financing would be most economical for Intensity?
D) At which bank does Intensity do the majority of its business transactions?

Question 27

Financing Corporate Expansion
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand the Chinese facility to accommodate increased demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.

-Which of the following most likely supports Intensity raising funds through intracorporate financing to expand its Chinese facility?

A) Intensity would save money on transaction fees and tax deductible interest payments.
B) Intensity's subsidiaries are struggling due to price wars with video game competitors.
C) The Chinese government has offered Intensity a low-interest loan for the expansion.
D) Eurobonds have been a popular choice among MNEs with facilities in Russia.

Question 28

Financing Corporate Expansion
Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand the Chinese facility to accommodate increased demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.

-Which of the following is most likely an advantage of Intensity accessing funds through the global capital market instead of through domestic sources?

A) availability of a large pool of investment opportunities
B) access to a vast number of 3 funding sources
C) concentration of major and secondary financial centers
D) reduced exposure to currency risk and rate fluctuation

Question 29

EZ Lawn Currency Risk
The EZ Lawn Corporation manufactures lawn equipment such as lawn mowers, blowers, and trimmers. The lawn equipment is assembled in the U.S. at a facility in Florida, but the firm outsources inputs from a number of countries, each with varying degrees of economic stability. Given the importance of the firm's sourcing activities, EZ Lawn managers are discussing methods which might reduce the currency risk faced by EZ Lawn.

-Which of the following would most likely minimize the currency risk of EZ Lawn?

A) Concentrate all of the EZ Lawn outsourcing to one or two neighboring nations.
B) Re-locate a team of EZ Lawn managers overseas to stay abreast of currency changes.
C) List EZ Lawn stock on foreign stock exchanges to offset any currency losses.
D) Assign an EZ Lawn manager the task of monitoring currency fluctuations.

Question 30

EZ Lawn Currency Risk
The EZ Lawn Corporation manufactures lawn equipment such as lawn mowers, blowers, and trimmers. The lawn equipment is assembled in the U.S. at a facility in Florida, but the firm outsources inputs from a number of countries, each with varying degrees of economic stability. Given the importance of the firm's sourcing activities, EZ Lawn managers are discussing methods which might reduce the currency risk faced by EZ Lawn.

-Which of the following would most likely be an effective currency risk strategy for EZ Lawn management?

A) increase prices of EZ Lawn products to cover currency issues
B) trade currency using the websites of investment banks
C) use a spot rate for long-term transactions between suppliers
D) monitor the economic trends of the supplier nations

Question 31

In a short essay, explain the concept of currency risk. How can inflation and interest create currency risk?

Question 32

In a short essay, explain the belief that a persistent trade deficit is harmful to the national economy. Why was the Bretton Woods Agreement initiated, and why was it terminated?

Question 33

In a short essay, describe four principles or organizations brought about by the Bretton Woods Agreement that remain important to international business and trade today. Why does the integration of financial and monetary activity worldwide continue to grow?

Question 34

In a short essay, describe the two main types of foreign exchange management used today. Provide examples of nations which use each type of system.

Question 35

In a short essay, describe the five major financial management tasks that are critical to firms active in international business transactions.

Question 36

In a short essay, describe three methods used to transfer funds within an MNE.

Question 37

In a short essay, describe the three types of currency exposure, and explain how foreign currency translation works.