1. The value of the Australian dollar (A$) today is £0.41.

Yesterday, the value of the

Australian dollar was £0.38. The Australian dollar by _______%.
a. depreciated; 7.90 c. appreciated; 7.90
b. depreciated; 7.30 d. appreciated; 7.30

ANSWER: C
(£0.41 - £0.38)/£0.38 = 7.90%
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2. An increase in UK interest rates relative to euro interest rates is likely to ________

the UK demand for euros and _________ the supply of euros for sale.
a. reduce; increase c. reduce; reduce
b. increase; reduce d. increase; increase

ANSWER: A
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3. In general, when speculating on exchange rate movements, the speculator will

borrow the currency that is expected to appreciate and invest in the country whose
currency is expected to depreciate.
a. true. b. false.

ANSWER: B
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4. Assume the following information regarding UK and European annualized interest

rates:

Currency Lending Rate Borrowing Rate

UK pound (£) 6.73% 7.20%
Euro (€) 6.80% 7.28%

Milly Bank can borrow either £20 million or €20 million. The current spot rate of
the euro is £0.75. Furthermore, Milly Bank expects the spot rate of the euro to be
£0.76 in 90 days. What is Milly Bank’s pound profit from speculating if the spot
rate of the euro is indeed £0.76 in 90 days?
a. £251,200
b. £251,386
c. £541,324
d. £561,813
e. £502,713

ANSWER: A
1. Borrow £20 million.

2. Convert the £20 million to £20,000,000 / £0.75 =

:€26,666,667.
 3. Invest the :€26,666,667 at an annualized rate of
6.80% for 90 days.

€26,315,789 x [1 + 6.80% (90/360)]

= :€27,120,000

4. Determine pounds owed: £20,000,000 x [1 + 7.20%

(90/360)] = £20,360,000.

5. Determine euros needed to repay pound loan:

£20,360,000 / £0.76 = :€26,789,474.

6. The euro profit is €27,120,000 - €26,789,474 =

€330,526 or €330,526 x 0.76 = £251,200.
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5. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per
pound:
a. U.S. demand for pounds would exceed the supply of pounds for sale and
there would be a shortage of pounds in the foreign exchange market.
b. U.S. demand for pounds would be less than the supply of pounds for sale
and there would be a shortage of pounds in the foreign exchange market.
c. U.S. demand for pounds would exceed the supply of pounds for sale and
there would be a surplus of pounds in the foreign exchange market.
d. U.S. demand for pounds would be less than the supply of pounds for sale
and there would be a surplus of pounds in the foreign exchange market.
e. U.S. demand for pounds would be equal to the supply of pounds for sale and
there would be a shortage of pounds in the foreign exchange market.

ANSWER: D
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6. If inflation in New Zealand suddenly increased while euro area inflation stayed the
same, there would be:
a. an inward shift in the demand schedule for NZ$ and an outward shift in the
supply schedule for NZ$.
b. an outward shift in the demand schedule for NZ$ and an inward shift in the
supply schedule for NZ$.
c. an outward shift in the demand schedule for NZ$ and an outward shift in the
supply schedule for NZ$.
d. an inward shift in the demand schedule for NZ$ and an inward shift in the
supply schedule for NZ$.

ANSWER: A
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 7. The exchange rates of smaller countries are very stable because the market for their
currency is very liquid.
a. true. b. false.

ANSWER: B
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8. Any event that reduces the euro area demand for Japanese yen should result in a(n)
_______ in the value of the Japanese yen with respect to _______, other things
being equal.
a. increase; euro c. decrease; noneuro currencies
b. increase; noneuro currencies d. decrease; euro

ANSWER: D
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9. News of a potential surge in U.S. inflation and zero Chilean inflation places
_______ pressure on the value of the Chilean peso. The pressure will occur
_______.
a. upward; only after the U.S. inflation surges
b. downward; only after the U.S. inflation surges
c. upward; immediately
d. downward; immediately

ANSWER: C
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10. If a country experiences high inflation relative to the UK, its exports to the UK
should _______________, its imports should ___________, and there is
__________ pressure on its currency's equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward

ANSWER: C
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11. Since supply and demand for a currency are constant (primarily due to government
intervention), currency values seldom fluctuate.
a. true. b. false.

ANSWER: B
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12. Relatively high Japanese inflation may result in an increase in the supply of yen for
sale and a reduction in the demand for yen.
a. true. b. false.

ANSWER: A
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1. The commonly accepted goal of the MNC is to:

a. maximize short-term earnings.
b. maximize shareholder wealth.
c. minimize risk.
d. A and C.
e. maximize international sales.

ANSWER: B
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2. Which of the following is not a form of corporate control that could reduce agency
problems for an MNC?
a. stock options.
b. hostile takeover threat.
c. investor monitoring.
d. all of the above are forms of corporate control that could reduce agency
problems for an MNC.

ANSWER: D
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3. Which of the following theories suggests that firms seek to penetrate new markets
over time?
a. theory of comparative advantage. c. product cycle theory.
b. imperfect markets theory. d. none of the above

ANSWER: C
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4. Licensing is the process by which a firm provides its technology (copyrights,

patents, trademarks, or trade names) in exchange for fees or some other specified
benefits.
a. true. b. false.

ANSWER: A
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 5. According to the text, products and services are generally becoming _______
standardized across countries, which tends to _______ the globalization of business.
a. more; encourage c. less; discourage
b. more; discourage d. less; encourage

ANSWER: A
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6. The Single European Act of 1987:

a. reduced competition in most industries.
b. eliminated competition in many industries.
c. reduced efficiency in most industries.
d. increased competition in most industries.

ANSWER: D
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7. _____________ are most commonly classified as a direct foreign investment.

a. Foreign acquisitions c. Licensing agreements
b. Purchases of international stocks d. Exporting transactions

ANSWER: A
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8. Which of the following is not mentioned in the text as a constraint interfering with
the MNC goal?
a. economic constraints. c. regulatory constraints.
b. environmental constraints. d. ethical constraints.

ANSWER: A
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9. Which of the following is not a way in which agency problems can be reduced
through corporate control?
a. executive compensation. c. acquisition of a foreign subsidiary.
b. threat of hostile takeover. d. monitoring by large shareholders.

ANSWER: C
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10. Due to the larger opportunity set of funding sources around the world from which
an MNC can choose, an MNC may be able to obtain capital at a lower cost than a
purely domestic firm.
a. true. b. false.

ANSWER: A
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11. One of the most prevalent factors conflicting with the realization of the goal of an
MNC is the existence of agency problems.
a. true. b. false.

ANSWER: A
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12. A centralized management style for an MNC results in relatively high agency costs.
a. true. b. false.

ANSWER: B
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1. Recently, the UK experienced an annual balance of trade representing a
__________.
a. large surplus (exceeding £100 c. level of zero
billion)
b. small surplus d. deficit

ANSWER: D
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2. An increase in the current account deficit will place _______ pressure on the home
currency value, other things equal.
a. upward
b. downward
c. no
d. upward or downward (depending on the size of the deficit)

ANSWER: B
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3. Which of the following would likely have the least direct influence on a country's
current account?
a. inflation.
b. national income.
c. exchange rates.
d. tariffs.
e. a tax on income earned from foreign stocks.

ANSWER: E
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4. The North American Free Trade Agreement (NAFTA) increased restrictions on:
a. trade between Canada and Mexico.
 b. trade between Canada and the U.S.
c. direct foreign investment in Mexico by U.S. firms.
d. none of the above.

ANSWER: D
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5. The primary component of the current account is the:

a. balance of trade. c. balance of capital market flows.
b. balance of money market flows. d. unilateral transfers.

ANSWER: A
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6. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
a. increased trade restrictions outside of North America.
b. lower trade restrictions around the world.
c. uniform environmental standards around the world.
d. uniform worker health laws.

ANSWER: B
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7. ______________ is (are) income received by investors on foreign investments in

financial assets (securities).
a. Portfolio income c. Unilateral transfers
b. Direct foreign income d. Factor income

ANSWER: D
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8. The World Bank's Multilateral Investment Guarantee Agency (MIGA):

a. offers various forms of export insurance.
b. offers various forms of import insurance.
c. offers various forms of exchange rate risk insurance.
d. provides loans to developing countries.
e. offers various forms of political risk insurance.

ANSWER: E
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9. A weakening of the U.S. dollar with respect to the British pound would likely
reduce the U.S. exports to Britain and increase U.S. imports from Britain.
a. true. b. false.

ANSWER: B
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10. Changes in country ownership of long-term and short-term assets are measured in
the balance of payments with the capital account.
a. true. b. false.

ANSWER: A
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11. Direct foreign investment by UK.-based MNCs occurs primarily in the Bahamas
and Brazil.
a. true. b. false.

ANSWER: B
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12. A tariff is a maximum limit on imports.

a. true. b. false.

ANSWER: B
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1. Kalons ltd. is a UK-based MNC that frequently imports raw materials from Canada.
Kalons is typically invoiced for these goods in Canadian dollars and is concerned
that the Canadian dollar will appreciate in the near future. Which of the following is
not an appropriate hedging technique under these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts.
c. purchase Canadian dollar put options.
d. purchase Canadian dollar call options.

ANSWER: C
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2. Which of the following is the most likely strategy for a UK firm that will be
receiving Swiss francs in the future and desires to avoid exchange rate risk (assume
the firm has no offsetting position in francs)?
a. purchase a call option on francs.
b. sell a futures contract on francs.
c. obtain a forward contract to purchase francs forward.
d. all of the above are appropriate strategies for the scenario described.

ANSWER: B
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3. Which of the following is true?

 a. Most forward contracts between firms and banks are for speculative
purposes.
b. Most future contracts represent a conservative approach by firms to hedge
foreign trade.
c. The forward contracts offered by banks have maturities for only four
possible dates in the future.
d. none of the above

ANSWER: D
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4. European currency options can be exercised _______; American currency options

can be exercised _______.
a. any time up to the expiration date; any time up to the expiration date
b. any time up to the expiration date; only on the expiration date
c. only on the expiration date; only on the expiration date
d. only on the expiration date; any time up to the expiration date

ANSWER: D
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5. A UK corporation has purchased currency call options to hedge a 70,000 dollar

payable. The premium is £0.015 and the exercise price of the option is £0.54. If the
spot rate at the time of maturity is £0.59, what is the total amount paid by the
corporation if it acts rationally?
a. £36,750. c. £37,800.
b. £1,050. d. £38,850.

ANSWER: D
Pounds paid when exercising the option = $70,000  £0.54 = £37,800.
Premium paid for options = 70,000  £0.015 = £1,050. Total pounds
paid = £37,800 + £1,050 = £38,850.
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6. Conditional currency options are:

a. options that do not require premiums.
b. options where the premiums are canceled if a trigger level is reached.
c. options that allow the buyer to decide what currency the option will be
settled in.
d. none of the above

ANSWER: B
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7. Which of the following are true regarding the options markets?

a. Hedgers and speculators both attempt to lower risk.
 b. Hedgers attempt to lower risk, while speculators attempt to make riskless
profits.
c. Hedgers and speculators are both necessary in order for the market to be
liquid.
d. all of the above

ANSWER: C
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8. The premium of a currency put option will increase if:

a. the volatility of the underlying asset goes up.
b. the time to maturity goes up.
c. the spot rate declines.
d. none of the above

ANSWER: D
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9. Which of the following is true of options?

a. The writer decides whether the option will be exercised.
b. The writer pays the buyer the option premium.
c. The buyer decides if the option will be exercised.
d. More than one of these.

ANSWER: C
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10. The purchase of a currency put option would be appropriate for which of the
following?
a. Investors who expect to buy a foreign bond in one month.
b. Corporations who expect to buy foreign currency to finance foreign
subsidiaries.
c. Corporations who expect to collect on a foreign account receivable in one
month.
d. all of the above

ANSWER: B
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11. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325.
The forward rate contains an annualized __________ of ___________%.
a. discount; -18.75
b. premium; 18.75
c. discount; -18.46
d. premium; 18.46
e. premium; 1.56
 ANSWER: B
(£0.325- £0.320)/£0.320  (360/30) = 18.75%
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12. Currency options are only traded on exchanges. That is, there is no over-the-counter
market for options.
a. true. b. false.

ANSWER: B
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1. Assume that a bank's bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its
C
bid-ask percentage spread is:
a. 4.00%. c. about 3.85%.
b. 4.26%. d. about 4.17%.

ANSWER: C
Bid-ask percentage spread = (£0.26 - £0.25)/£0.26 = 3.85%
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2. The forward rate is the exchange rate used for immediate exchange of currencies.
B
a. true. b. false.

ANSWER: B
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3. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to
B
£0.16. The value of the Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars. c. about 2.36 Canadian dollars.
b. about .3137 Canadian dollars. d. about 2.51 Canadian dollars.

ANSWER: B
£0.16/£0.51 = .3137
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4. _______ is not a bank characteristic important to customers in need of foreign

C
exchange.
a. Quote competitiveness
b. Speed of execution
c. Forecasting advice
d. Advice about current market conditions
e. All of the above are important bank characteristics to customers in need of
foreign exchange.

ANSWER: E
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5. LIBOR is:
A
a. the interest rate commonly charged for loans between banks.
b. the average inflation rate in European countries.
c. the maximum loan rate ceiling on loans in the international money market.
d. the maximum deposit rate ceiling on deposits in the international money
market.
e. the maximum interest rate offered on bonds that are issued in London.

ANSWER: A
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6. From 1944 to 1971, the exchange rate between any two currencies was typically:
C
a. fixed within narrow boundaries.
b. floating, but subject to central bank intervention.
c. floating, and not subject to central bank intervention.
d. nonexistent; that is currencies were not exchanged, but gold was used to pay
for all foreign transactions.

ANSWER: A
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7. Futures contracts are typically _______; forward contracts are typically _______.
B
a. sold on an exchange; sold on an exchange
b. offered by commercial banks; sold on an exchange
c. sold on an exchange; offered by commercial banks
d. offered by commercial banks; offered by commercial banks

ANSWER: C
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8. When the foreign exchange market opens in the UK each morning, the opening
A
exchange rate quotations will be based on the:
a. closing prices in the U.S. during the previous day.
b. closing prices in Canada during the previous day.
c. prevailing prices in locations where the foreign exchange markets have been
open.
d. officially set by central banks before the U.S. market opens.

ANSWER: C
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9. Under the gold standard, each currency was convertible into gold at a specified rate,
A
and the exchange rate between two currencies was determined by their relative
convertibility rates per ounce of gold.
 a. true. b. false.

ANSWER: A
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10. The strike price is also known as the premium price.

B
a. true. b. false.

ANSWER: B
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11. Eurobonds are certificates representing bundles of stock.

B
a. true. b. false.

ANSWER: B
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12. A share of the ADR of a Dutch firm represents one share of that firm's stock that is
A
traded on a Dutch stock exchange. The share price of the firm was 15 euros when
the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus,
the price of the ADR should be _____.
a. $13.64
b. $15.00
c. $16.50
d. 16.50 euros
e. none of the above

ANSWER: C
15  $1.10 = $16.50
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