Deck 14: Global Financial Management

Question 1

Clearing House Interbank Payment System (CHIPS)is an organization that provides secure communication for contracts,invoices,and other trade documents that normally accompany cash payments.

Answer 1

False

Question 2

A put option obligates an investor to sell an asset at a predetermined price.

Answer 2

False

Question 3

The cost of equity is required rate of return by stockholders in a firm and is estimated by means of the Capital Asset Pricing Model (CAPM).

Answer 3

True

Question 4

If losses occur causing a market participant's balance to fall below the maintenance margin at the end of the trading day,a call option occurs that requires the bank to replenish the investor's trading account.

Question 5

Bank and government loans used by exporters to finance working capital are called trade financing.

Question 6

Bonds that are sold in any country outside the home country,but in the home country's currency,are called junk bonds.

Question 7

The weighted average of different interest rates paid on long-term borrowings is called the _____.

A) net present value
B) cost of debt
C) cost of equity
D) cost of capital
E) exchange risk beta

Question 8

Marked-to-market involves the trading of futures contracts in major currencies and offering price transparency and efficiency in addition to elimination of counterparty risk due to guaranteed payments on contract.

Question 9

The two types of short-term effects on currency movements are transactions risk and transformational risk.

Question 10

A group of banks that collectively make a loan to a firm is called a hedge.

Question 11

The flexibility to unwind forex hedges when they are no longer needed is a convenient advantage.

Question 12

The sensitivity of a stock to market risk affected by currency movements is called the weighted average cost of capital.

Question 13

Prolonged periods of relatively high dollar values in world currency markets would be a disadvantage to U.S.exporters and an advantage to their foreign competitors.

Question 14

A small commitment fee needed to purchase a futures contract is called a _____.

A) margin
B) speculator
C) short position
D) long position
E) marked-to-market

Question 15

Selling a currency in a currency futures contract and profiting on a decrease in the value of the currency over time is called _____.

A) hedging
B) syndicating
C) a short position
D) a long position
E) marked-to-market exchange position

Question 16

The price paid by the buyer to the seller for an option contract is called a _____.

A) call option
B) put option
C) premium
D) currency swap
E) marked-to-market

Question 17

Currency swaps allow firms to exchange currencies at a previously agreed exchange rate as a way to hedge exchange rate movements.

Question 18

Of the following,which is NOT true about the IMF and World Bank?

A) They were established in 1890.
B) Their purposes are to promote international monetary stability and international trade.
C) The IMF provides short-term loans to countries in financial crises.
D) More than 180 countries participate as members of the IMF.
E) The World Bank focuses upon long-term loans to developing countries seeking financing for economic reform purposes intended to raise the standard of living.

Question 19

Moody's and Standard and Poor's provide bond ratings,which are important in assuring the credit quality to foreign investors.

Question 20

On October 19,1987 (Black Monday)stock prices in Hong Kong began collapsing and spread throughout the day into the Europe and then North America.This is an example of contagion.

Question 21

Using currency derivatives to reduce potential transaction,translation,and economic risks of currency movements that could lead to losses for a firm or investor is called_____.

A) hedging
B) speculating
C) a short position
D) an organized exchange position
E) a marked-to-market position

Question 22

A simple agreement wherein the exporter sends an invoice with the goods and the exporter pays upon the receipt is called a(n)_____.

A) open account
B) commercial letter of credit
C) banker's acceptance
D) participation loan
E) bond rating

Question 23

Home bias tends to

A) reduce diversification.
B) increase contagion.
C) increase diversification.
D) reduce contagion.
E) increase the price of domestic bonds.

Question 24

Buying a currency in a currency futures contract and profiting on an increase in the value of the currency over time is called _____.

A) hedging
B) syndicating
C) a short position
D) a long position
E) marked-to-market

Question 25

Bonds that are sold in any country outside the home country,but in the home country's currency,are called _____.

A) closed bonds
B) foreign bonds
C) domestic bomds
D) Eurobonds
E) junk bonds

Question 26

A basket of currencies consisting of dollars,euros,pounds,and yen created by the International Monetary Fund is known as the _____.

A) Trade Right
B) Value Factor Right
C) Currency Right
D) Export-Import Right
E) Special Drawing Right

Question 27

Losses that are incurred and that cause the participant's balance to fall below the maintenance margin at the end of the trading day is called a _____.

A) margin sell
B) margin call
C) short position
D) long position
E) marked-to-market

Question 28

Moody's and Standard and Poor's issue _____.

A) open accounts
B) commercial letters of credit
C) participation loans
D) exchange rates
E) bond ratings

Question 29

Large international firms deal in considerable volumes of goods and often must obtain a(n)_____ from a group of banks known as a syndicate..

A) commercial loan
B) call option
C) banker's acceptance
D) participation loan
E) open account

Question 30

A stock value measured with the coefficient obtained by regressing the stock's return on a currency's return over time is known as the _____.

A) net present value
B) value factor
C) exchange rate sensitivity
D) cost of capital
E) beta risk

Question 31

An Export-Import Bank is a(n)

A) organization that provides secure communications for trade documents.
B) derivatives market run by a syndicate of large banks.
C) organization that provides large,wholesale dollar payments services for governments.
D) U.S.government export finance agency that seeks to level international competition.
E) large global bank that makes loans exclusively to international firms.

Question 32

A derivatives market run by large banks is called a(n)_____.

A) margin contract
B) over-the-counter market
C) currency forward contracts
D) organized exchanges
E) marked-to-market

Question 33

The safest method available to an exporter,but that which exposes the importer to some risk related to delivery of goods,is called _____.

A) payment in advance
B) a commercial letter of credit
C) a banker's acceptance
D) a syndicate
E) a bond rating

Question 34

_____ risk refers to the ways in which long-term exchange rate movements affect firms.

A) Transactions
B) Translation
C) Economic
D) Consolidated
E) Accounting

Question 35

_____ allow firms to exchange currencies at a previously agreed exchange rate as a way to hedge exchange rate movements.

A) Call options
B) Put options
C) Premiums
D) Currency swaps
E) Marked-to-market contracts

Question 36

_____ offers payment protection to both exporters and importers,as the importer's bank writes a guarantee of payment.

A) Payment in advance
B) A commercial letter of credit
C) A banker's acceptance
D) A syndicate
E) A bond rating

Question 37

Two kinds of short-term effects of currency movements are _____ risk and _____ risk.

A) transactions; translation
B) transactions; exchange rate
C) economic; translation
D) consolidated; economic
E) accounting; translation

Question 38

Forward contracts

A) can never be arranged in the over-the-counter market.
B) are less standardized than futures contracts.
C) cannot be customized to meet the hedging needs of the buyer.
D) are never marked-to-market.
E) have a high liquidity risk related to immediate cash access to pay for possible losses.

Question 39

When a bank sells a LC into the financial marketplace as a money market instrument,it is called a(n)_____.

A) payment in advance
B) commercial letter of credit
C) banker's acceptance
D) syndicate
E) bond rating

Question 40

Of the following,which is NOT true about international banking and payments?

A) Payment in advance is the safest method.
B) Payment in advance does not expose the importer to some risk concerning delivery of the goods.
C) A commercial letter of credit offers payment protection to both parties.
D) A commercial letter of credit is usually irrevocable.
E) An open account is a simple agreement wherein the exporter sends an invoice with the goods and the exporter pays upon the receipt.

Question 41

The sensitivity of a stock to market risk affected by currency movements is known as the _____.

A) net present value
B) value factor
C) exchange rate sensitivity
D) cost of capital
E) exchange risk beta
Enter the appropriate word(s)to complete the statement.

Question 42

Scenario - The Gayla Corporation
The Gayla Corporation is a multinational business that conducts operations in twelve foreign markets.This multi-million dollar organization is very familiar with currency exchanges and has considerable understanding when it comes to the risks associated with operating in the global market arena.The Gayla Corporation claims it would not be as successful without the expertise of the financial wizards that work for it.The company has not lost money so far and plans to stay that way.
The financial experts of the Gayla Corporation are very much aware of the organization's cost of debt.Which of the following best identifies what cost of debt means to the corporation?

A) Futures contracts in which gains are earned at the end of each trading day
B) Ways in which long-term exchange rate movements affect firms
C) Sum of the cost of capital and the cost of equity
D) The required rate of return by stockholders in a firm that is estimated by means of CAPM
E) Weighted average of different interest rates paid on long-term borrowings

Question 43

______ is an examination of optimistic,expected,and pessimistic scenarios to give a more complete picture of the risks and returns of investments abroad.

Question 44

_______ accounting statements are the income statements and balance sheets of multinational corporations and of all subsidiaries abroad due to home tax requirements.

Question 45

A holding firm is a(n)______ firm that is common in multinational corporations.

Question 46

Scenario - The Gayla Corporation
The Gayla Corporation is a multinational business that conducts operations in twelve foreign markets.This multi-million dollar organization is very familiar with currency exchanges and has considerable understanding when it comes to the risks associated with operating in the global market arena.The Gayla Corporation claims it would not be as successful without the expertise of the financial wizards that work for it.The company has not lost money so far and plans to stay that way.
The Gayla Corporation must fully understand and effectively handle all the ways in which long-term exchange rate movements affect the firm.Which of the following best identifies what this organization is facing in this situation?

A) Economic risk
B) Beta risk
C) Transactions risk
D) Hedging
E) Translation risk

Question 47

Scenario - Aero,Inc.
Aero,Inc.started from the idea of Brad Aerostle of Madison,South Dakota in 1992.Brad earned a financial degree from Harvard and had watched the financial markets for years.Armed with college credentials and knowledge,he believed he could offer needed services to individuals and companies desiring to conduct business around the globe.From the minute Brad put his idea into motion,his brainchild - Aero,Inc.- proved quite profitable.
Aero,Inc.currently has over five thousand clients ranging from slightly wealthy individuals to very rich and thriving corporations around the world.Brad's skill at what he does has made his company a sought out firm by those who want to prosper in the foreign marketplace.
When Aero,Inc.recommends purchasing futures contracts to its clients,it always informs the clients of the rather small commitment fee that is needed to purchase a futures contract.Which one of the following best identifies what this fee is called?

A) Weighted average cost of capital
B) Margin
C) Put option
D) Beta risk
E) Margin call

Question 48

_______ is the safest method available to an exporter,but that which exposes the importer to some risk related to delivery of goods.

Question 49

Whether a firm has growth or value and how this firm characteristic affects an estimate of the cost of equity is called the _____.

A) net present value
B) value factor
C) cost of equity
D) cost of capital
E) beta risk

Question 50

_____ risk is associated with the short-term effects of currency movements on the consolidated accounting statements of a firm.

A) Transactions
B) Translation
C) Economic
D) Consolidated
E) Accounting

Question 51

Investors who attempt to earn profits from trading in currencies or currency derivatives are referred to as _______.

Question 52

How short-term changes in exchange rates can affect operating costs and revenues of firms engaged in international business activities is referred to as ________ risks.

Question 53

The impact of random change in the value of one currency with respect to other currencies is called the _____ risk.

A) transactions
B) exchange rate
C) economic
D) consolidated
E) accounting

Question 54

______ is a coefficient obtained by regressing a stock's return on a currency's return over time.

Question 55

Scenario - Aero,Inc.
Aero,Inc.started from the idea of Brad Aerostle of Madison,South Dakota in 1992.Brad earned a financial degree from Harvard and had watched the financial markets for years.Armed with college credentials and knowledge,he believed he could offer needed services to individuals and companies desiring to conduct business around the globe.From the minute Brad put his idea into motion,his brainchild - Aero,Inc.- proved quite profitable.
Aero,Inc.currently has over five thousand clients ranging from slightly wealthy individuals to very rich and thriving corporations around the world.Brad's skill at what he does has made his company a sought out firm by those who want to prosper in the foreign marketplace.
One of the prominent concerns the clients of Aero,Inc.express is that of currency fluctuations.The clients know fluctuations in currency can wind up costing them money.Aero,Inc.alleviates its clients concern by suggesting the client enter into a situation where currencies can be exchanged at a previously agreed exchange rate as a way to hedge exchange rate movements.Which one of the following best identifies what Aero,Inc.is likely suggesting?

A) Currency swap
B) Call option
C) Sensitivity analysis
D) Speculation
E) Diversification

Question 56

A currency swap combined with a(n)______ swap is called a pain vanilla currency swap.

Question 57

Scenario - Aero,Inc.
Aero,Inc.started from the idea of Brad Aerostle of Madison,South Dakota in 1992.Brad earned a financial degree from Harvard and had watched the financial markets for years.Armed with college credentials and knowledge,he believed he could offer needed services to individuals and companies desiring to conduct business around the globe.From the minute Brad put his idea into motion,his brainchild - Aero,Inc.- proved quite profitable.
Aero,Inc.currently has over five thousand clients ranging from slightly wealthy individuals to very rich and thriving corporations around the world.Brad's skill at what he does has made his company a sought out firm by those who want to prosper in the foreign marketplace.
Aero,Inc.likes to make its customers aware of what is taking place within the global financial world.One of the lessons it imparts to its clients is about the International Monetary Fund's special drawing right.Which of the following best identifies what Aero,Inc.would be discussing with its clients?

A) The short-term effects of currency movements on the consolidated accounting statements of a firm
B) The ways in which long-term exchange rate movements affect firms
C) Buying a currency in a currency futures contract and profiting on an increase in the value of the currency over time
D) The Global Center for Financial Restructuring
E) A basket of currencies consisting of dollars,euros,pounds,and yen

Question 58

The required rate of return demanded by stock and bond investors and used in net present value capital budgeting analyses as the discount rate is called the _____.

A) net present value
B) cost of debt
C) cost of equity
D) cost of capital
E) exchange risk beta

Question 59

______ is the sensitivity of a stock to market risk affected by currency movements.

Question 60

Large global banks are called _______ center banks.

Question 61

Scenario - The Gayla Corporation
The Gayla Corporation is a multinational business that conducts operations in twelve foreign markets.This multi-million dollar organization is very familiar with currency exchanges and has considerable understanding when it comes to the risks associated with operating in the global market arena.The Gayla Corporation claims it would not be as successful without the expertise of the financial wizards that work for it.The company has not lost money so far and plans to stay that way.
When the Gayla Corporation conducts its operations in foreign markets,its customers often pay in different forms of currency.Many times there is a difference in the value of that currency received in comparison to the company's U.S.currency.Which of the following best identifies what the Gayla Corporation is experiencing?

A) Translation risk
B) Economic risk
C) Short position
D) Exchange rate risk
E) Transactions risks