Test Two
1.Multiple choices: (Questions 1-25 carry two points each)
(1)The Mexican one-year interest rate is 27％, while the US one-year interest rate is 9％.If a US firm creates a one-year deposit in Mexico, the Mexican peso will have to________against the US dollar by________in order to make that investment have an effective yield that is achievable in the US.
a.appreciate; 18 percent
b.depreciate; 36 percent
c.depreciate; 14 percent
d.appreciate; 14 percent
e.depreciate; 8.5 percent
(2)Nothing can achieve all but one of the following________.
a.cross border transactions between subsidiaries are reduced
b.transactions costs are reduced
c.currency conversion costs are reduced
d.transaction exposure is eliminated
(3)A foreign subsidiary or affiliate will most likely slow the rate by which it transfers earnings and cash flows to the parent firm if________.
a.it feels the country of residence is increasingly politically unstable
b.intra-firm payables are in the parent’s currency, which is currently appreciating
c.the parent is domiciled in a country of lower tax rates than that of the foreign affiliate
d.All of the above.
e.None of the above.
(4)The primary reason for the blocking of funds by a host country is________.
a.the country’s persistent inability to earn hard currencies
b.the country’s own currency is being blocked elsewhere
c.a change of government to a more socialistic regime
d.the country’s overabundance of exports
e.the country’s previous negative experience with multinational firms
(5)A US-based MNC has one subsidiary in a 40％ tax rate country and another in a 25％ tax rate country.To increase its overall after-tax earnings, the parent should________.
a.subsidize the high-tax subsidiary by selling supplies to it for lower prices
b.shift expenses from high-tax subsidiary to the low tax subsidiary
c.have the low-tax subsidiary decrease its prices charged for materials exported to the high tax subsidiary
d.None of the above.
(6)Assume that a US firm considers investing in British one-year treasury securities.The interest rate on these securities is 12％, while the interest rate on US treasuries is 10％.The firm believes that today’s spot rate is an appropriate forecast for the spot rate of the pound in one year.Based on this information, the effective yield on British treasuries from the US firm’s perspective is________.
a.equal to the US interest rate
b.equal to the British interest rate
c.lower than the US interest rate
d.higher than the British interest rate
e.lower than the British interest rate, but higher than the US interest rate
(7)A host country government would be least likely to provide incentives for foreign direct investment to a company if the firm planning FDI________.
a.would compete with local firms of the host country
b.would produce a good not currently available in the host country
c.would produce and export a good to other countries
d.b and c
(8)International Banking Facilities (IBFs)________.
a.must by law be physically located offshore
b.may lend to US and foreign citizens
c.are a way for US banks to attract Eurodollars
d.may accept deposits only in US dollars
e.All of the above are true.
(9)The risks of international lending may be classified as________.
a.commercial risk
b.sovereign risk
c.currency risk
d.country risk
e.All of the above.
(10)________is/are motivations for making foreign direct investments.
a.Market seeking
b.Raw material seeking
c.Production efficiency seeking
d.Knowledge seeking
e.All of the above.
(11)When evaluating international project cash flows,________is/are relevant.
a.future inflation
b.blocked funds
c.remittance provisions
d.All of the above.
e.a and b
(12)Assume a MNC establishes a subsidiary where it has no existing business.The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when________.
a.the subsidiary finances the entire investment by local borrowing
b.the subsidiary finances most of the investment through local borrowing
c.the parent finances most of the investment
d.the parent finances the entire investment
e.None of the above.
(13)Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to________over time, and if the interest rate in that country is relatively________.
a.appreciate; low
b.appreciate; high
c.depreciate; high
d.depreciate; low
e.None of the above.
(14)It has been suggested that poor management by________in the developed countries are responsible for causing the international debt crisis, while________in the developed countries are adversely affected by it.
a.non-bank MNCs; non-bank MNCs
b.non-bank MNCs; banks
c.banks; non-bank MNCs
d.a and b
(15)Firm “X” conducts all business transactions in US dollars.If it issues a currency cocktail bond, it can________.
a.reduce exchange rate risk relative to issuing a bond denominated in US dollars
b.reduce exchange rate risk relative to issuing a bond denominated in a single foreign currency
c.a and b
d.None of the above.
(16)Liabilities of Eurobanks are mainly________.
a.time deposits in small amounts
b.time deposits in large amounts
c.demand deposits in large amounts
d.demand deposits in small amounts
(17)Because reserve requirements________imposed on foreign currency deposits at Eurobanks, the spread between the average rate offered on deposits and charged on loans would need to be________in order to achieve the same profit as banks that do not accept foreign currency deposits.
a.are; narrowed
b.are not; narrowed
c.are; widened
d.are not; widened
(18)When a US based MNC purchases some of a developing country’s outstanding loans at a discount in the secondary market, then trades the debt to the country’s government in exchange for some assets that are being liquidated by the government, this is an example of________.
a.consignment
b.an increase in loan loss reserves
c.a debt-equity swap
d.a first stage of bankruptcy
(19)A “Yankee” bond is a________.
a.local bond
b.foreign bond
c.eurobond
d.None of the above.
(20)LIBOR is________.
a.the interest rate commonly charged for loans between Eurobanks
b.the average inflation rate in European countries
c.the maximum loan rate on Eurocurrency loans
d.the maximum interest rate offered on bonds that are issued in London
(21)The Eurocurrency 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 which convert foreign currency for tourists and business visitors
(22)In the early 1980s, global demand for the exports of less developed countries (LDCs)________, and these LDCs experienced severe balance of trade________.
a.decreased; surpluses
b.decreased; deficits
c.increased; deficits
d.increased; surpluses
(23)That________is(are)a reason(s)why debt-equity swaps may not reduce the risks of banks.
a.the only demand for existing LDC loans is from financial institutions willing to assume greater exposure
b.banks that acquire an equity interest in LDC assets may not have the expertise to manage them
c.the secondary market for LDC loans is inactive
d.some equity investments in LDCs may be just as risky as the LDC loans that were traded in
e.b and d
(24)If a US multinational firm borrows Euro for one year at 8％ interest, and during the year the Euro appreciates by 7％ relative to the dollar, the approximate before-tax cost of this debt is________.
a.14.64％
b.15.64％
c.15.49％
d.15.56％
e.16.64％
(25)A multinational firm can choose all of the following modes of entry for foreign direct investment except________.
a.exporting products to a local firm
b.a joint venture with a local partner
c.a 100％-owned Green-field subsidiary
d.a merger or acquisition of an existing local firm
e.a strategic alliance with a partner
2.Essay questions: (Questions 26-30 carry ten points each)
(26)Explain why each of the following categories of participants enters the foreign exchange market: a.retail clients; b.commercial banks; c.foreign exchange brokers; d.central banks.
(27)Given PPP and the following information, what should the exchange rate be at the end of the year?
a.F0(CHF/GBP)= 4.0000
b.Rate of inflation in the Switzerland = 2％ per year
c.Rate of inflation in the United Kingdom = 10％ per year
(28)What is the exchange rate system negotiated in the Bretton Woods agreement? Why did the system fail?
(29)You are an English producer of candy expecting a USD 2,000,000 payment in 30 days from your US client.The exchange rate is S(USD/GBP)ask = 1.6725.What will your income in sterling be if the rate goes to 1.6500? If F1/12(USD/GBP)ask = 1.6647 and you sell forward, what will your income be?
(30)What are the advantages of the fixed exchange rates and the floating exchange rates?