Name: ________________________ Class: ___________________ Date: __________ ID: A

2014-15 Intl. Finance - 3rd term exercises

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Use the following information to calculate the dollar cost of using a money market hedge to hedge
200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of
the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest
rate is 4% over the 180-day period.
a. $391,210.
b. $396,190.
c. $388,210.
d. $384,761.
e. none of the above

____ 2. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate
substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

____ 3. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the
next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day
forward rate is $.23. Furthermore, Money's financial center has indicated that the possible values of the
Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70,
respectively. Based on this information, the revenue from hedging minus the revenue from not hedging
receivables is____.
a. $0. c. $7,500.
b. $7,500. d. none of the above

____ 4. Quasik Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call
option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with
an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its
receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from
the currency option hedge?
a. $219,000. c. $216,000.
b. $222,000. d. $213,000.

1
Name: ________________________ ID: A

____ 5. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of
350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per
unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in
180 days is:

Future Spot Rate Probability

$.46 20%
$.48 30%
$.52 50%

The 90-day forward rate of the Australian dollar is $.50.

What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a. 0%. c. 50%.
b. 80%. d. none of the above

____ 6. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a. receivable; purchase c. payable; purchase
b. payable; sell d. none of the above

____ 7. The ____ does not represent an obligation.

a. long-term forward contract c. parallel loan
b. currency swap d. currency option

____ 8. FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call
option with an exercise price of $0.75 and a premium of $0.01 is available. Also, a 90-day put option with
an exercise price of $0.73 and a premium of $0.01 is available. FAI plans to purchase options to hedge its
receivable position. Assuming that the spot rate in 90 days is $0.71, what is the net amount received from
the currency option hedge?
a. $219,000 c. $216,000
b. $222,000 d. $213,000

____ 9. Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to
appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent
may request that the subsidiary ____ in order to benefit from the expectation about the pound.
a. increase; postpone remitting earnings until the pound strengthens
b. decrease; postpone remitting earnings until the pound strengthens
c. decrease; remit earnings immediately before the pound strengthens
d. increase; remit earnings immediately before the pound strengthens

____ 10. In capital budgeting analysis, the use of a cumulative NPV is useful for:
a. determining a probability distribution of NPVs.
b. determining the time required to achieve a positive NPV.
c. determining how the required rate of return changes over time.
d. determining how the cost of capital changes over time.
e. A and B

____ 11. A previously undertaken project in a foreign country may no longer be feasible because:
a. interest rates have declined.
b. the MNC's cost of capital has decreased.
c. the host government has increased its tax rates substantially.
d. exchange rate projections changed from a depreciation to an appreciation of the foreign
currency.

2
Name: ________________________ ID: A

____ 12. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs?
a. Differences in estimated cash flows to be generated by the foreign target
b. Differences in estimated exchange rates
c. Differences in required rates of return
d. All of the above are possible reasons why the valuation of a foreign target may vary
among MNCs

____ 13. Country risk analysis is important because it:

a. focuses on whether to hedge contractual transactions.
b. focuses on the competitor firms in its industry.
c. can be used to improve the analysis used to make long-term investing decisions.
d. all of the above

____ 14. According to the text, the cost of debt:

a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.

____ 15. Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in
Germany:

U.S. risk-free rate = 4%

German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%

What is Brama's after-tax cost of dollar-denominated debt?

a. 7.0%. c. 8.0%.
b. 4.9%. d. 5.6%.

____ 16. Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can
borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner's tax
rate is 40%. What is Werner's weighted average cost of capital?
a. 10.80% c. 9.20%
b. 12.40% d. None of the above

____ 17. When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC's exposure to
exchange rate risk can be minimized if:
a. the parent issues dollar-denominated equity and provides the proceeds to the subsidiary.
b. the parent provides its retained earnings to the Mexican subsidiary.
c. the subsidiary obtains a dollar-denominated loan from a financial institution.
d. the subsidiary obtains a peso-denominated loan from a financial institution.

____ 18. According to the text, international trade activity has generally ____ over time. This should cause the
popularity of trade finance techniques to ____ over time.
a. increased; increase c. decreased; increase
b. increased; decrease d. decreased; decrease

3
Name: ________________________ ID: A

____ 19. Which of the following payment terms provides the supplier with the greatest degree of protection?
a. letters of credit. c. prepayment.
b. consignment. d. drafts (sight/time).

____ 20. Under a(n) ____ arrangement, the exporter ships the goods to the importer while still retaining actual title
to the merchandise.
a. draft c. prepayment
b. consignment d. open account

____ 21. Under a ____, the exporter is paid once shipment has been made and the draft is presented to the buyer for
payment; under a ____, the exporter provides instructions to the buyer's bank to release shipping
documents against acceptance, by the buyer, of the draft.
a. sight draft; time draft c. bill of lading; banker's acceptance
b. sight draft; banker's acceptance d. time draft; sight draft

____ 22. Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ$ is
$.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based
on this information, what is the effective financing rate for a U.S. firm that takes out a one-year,
uncovered NZ$ loan?
a. about 1.7%.
b. about 0.0%.
c. about 14.7%.
d. about 15.4%.
e. about 8.3%.

____ 23. A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It
uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year interest rate is
10%. The expected effective financing rate on Swiss francs is:
a. equal to the U.S. interest rate.
b. less than the U.S. interest rate, but more than the Swiss interest rate.
c. equal to the Swiss interest rate.
d. less than the Swiss interest rate.
e. more than the U.S. interest rate.

____ 24. ____ are free of default risk.

a. Euronotes c. Euro-commercial paper
b. Eurobonds d. None of the above

____ 25. Countries with a ____ rate of inflation tend to have a ____ interest rate.
a. high; low c. high; high
b. low; high d. A and B are correct

____ 26. Netting 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.

____ 27. According to the international Fisher effect:

a. exchange rates adjust to compensate for income differentials between countries.
b. interest rates adjust to compensate for income differentials between countries.
c. exchange rates adjust to compensate for interest rate differentials between countries.
d. exchange rates adjust to compensate for risk differentials between countries.

4
Name: ________________________ ID: A

____ 28. A common purpose of inter-subsidiary leading or lagging strategies is to:

a. allow subsidiaries with excess funds to provide financing to subsidiaries with deficient
funds.
b. assure that the inventory levels at subsidiaries are maintained within tolerable ranges.
c. change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary.
d. measure the performance of subsidiaries according to how quickly subsidiaries remit
dividend payments to the parent.

____ 29. ____ may complicate cash flow optimization.

a. The use of a zero-balance account c. Leading and lagging
b. Government restrictions d. None of the above

____ 30. The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the
foreign currency.
a. inflation rate; exchange rate movements c. interest rates; exchange rate movements
b. income level; interest rates d. interest rates; amount invested

____ 31. Which of the following statements is false?

a. If interest rate parity exists, covered interest arbitrage is not worthwhile.
b. If interest rate parity holds and the forward rate is an accurate forecast of the future spot
rate, an uncovered investment in a foreign security is not worthwhile.
c. If interest rate parity exists and the forward rate is an unbiased forecast of the future spot
rate, an uncovered investment in a foreign security will on average earn an effective yield
similar to an investment in a domestic security.
d. If interest rate parity exists and the forward rate is expected to underestimate the future
spot rate, an uncovered investment in a foreign security is expected to earn a lower
effective yield than an investment in a domestic security.

True/False
Indicate whether the statement is true or false.

____ 1. To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
a. True
b. False

____ 2. Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign
countries, but they may not be available for many emerging market currencies.
a. True
b. False

____ 3. The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary
cash flows but on the cash flows that it ultimately receives.
a. True
b. False

____ 4. In multinational capital budgeting, depreciation is treated as a cash outflow.

a. True
b. False

____ 5. In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping
documents and the collection of payment.
a. True
b. False

5
Name: ________________________ ID: A

____ 6. Under a countertrade arrangement, the exporter ships the goods to the importer while retaining title to the
merchandise until it is sold.
a. True
b. False

____ 7. The interest rate of euronotes is based on the T-bill rate.

a. True
b. False

____ 8. Although netting typically increases the need for foreign exchange conversion, it generally reduces the
number of cross border transactions between subsidiaries.
a. True
b. False

____ 9. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign
and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore
will be more attractive.
a. True
b. False

6
 ID: A

2014-15 Intl. Finance - 3rd term exercises

Answer Section

MULTIPLE CHOICE

1. ANS: E
SOLUTION:
1. Need to invest £190,476 (£200,000/1.05) = £190,476.

2. Need to exchange $384,762 to obtain the £190,476 (£190,476  $2.02) = $384,762.

3. At the end of 180 days, need $400,152 to repay loan ($384,762  1.04) = $400,152.
2. ANS: A
3. ANS: C
SOLUTION: RCH(1) = (MYR1,500,000  $0.20)  (MYR1,500,000  $0.23)
= $45,000
RCH(2) = (MYR1,500,000  $0.25)  (MYR1,500,000  $0.23)
= $30,000
E[RCH] = (.30)(45,000) + (.7)(30,000) = 7,5000
4. ANS: C
SOLUTION: ($.73  $.01)  300,000 = $216,000.
5. ANS: C
SOLUTION: Arizona will exercise when the exercise price is greater than the future spot
(20% + 30% = 50%).
6. ANS: C
7. ANS: D
8. ANS: C
9. ANS: A
10. ANS: B
11. ANS: C
12. ANS: D
13. ANS: C
14. ANS: C
15. ANS: B
SOLUTION: (4%  3%) x (1- 0.3) = 4.9%
16. ANS: A
17. ANS: D
18. ANS: A
19. ANS: C
20. ANS: B
21. ANS: A
22. ANS: A
SOLUTION:
Effective financing rate = (1 + 6.5%)[1 + (7.7%)]  1 = about 1.7%
23. ANS: C
24. ANS: D
25. ANS: C
26. ANS: D

1
 ID: A

27. ANS: C
28. ANS: A
29. ANS: B
30. ANS: C
31. ANS: D

TRUE/FALSE

1. ANS: T
2. ANS: T
3. ANS: T
4. ANS: F
5. ANS: F
6. ANS: F
7. ANS: F
8. ANS: F
9. ANS: F