Strayer FIN 535 Final Exam 1&2 Answers 2017
1. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
a. absolute form of PPP
b. relative form of PPP
c. international Fisher effect (IFE)
d. interest rate parity (IRP)
2. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. the value of the euro would often appreciate against the dollar.
b. the value of the euro would often depreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
3. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?
a. purchasing power parity (PPP)
b. triangular arbitrage
c. international Fisher effect (IFE)
d. interest rate parity (IRP)
4. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
b. some corporations with excess cash could have generated profits on average from covered interest arbitrage.
c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.
5. Which of the following is not a limitation of technical forecasting:
a. It’s not suitable for long-term forecasts of exchange rates.
b. It doesn’t provide point estimates or a range of possible future values.
c. It cannot be applied to currencies that exhibit random movements.
d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecasts.
6. A fundamental forecast that uses multiple values of the influential factors is an example of:
a. sensitivity analysis.
b. discriminant analysis.
c. technical analysis.
d. factor analysis.
7. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.
a. appreciate; depreciate
b. appreciate; appreciate
c. depreciate; depreciate
d. depreciate; appreciate
8. Which of the following is not a method of forecasting exchange rate volatility?
a. using the absolute forecast error as a percentage of the realized value
b. using the volatility of historical exchange rate movements as a forecast for the future
c. using a time series of volatility patterns in previous periods
d. deriving the exchange rate’s implied standard deviation from the currency option pricing model
9. If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.
a. weaken; delay
b. weaken; expedite
c. appreciate; expedite
d. none of the above
10. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.
a. favorably; stronger
b. favorably; weaker
c. not; stronger
d. not; weaker
11. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are
12. Transaction exposure reflects:
a. the exposure of a firm’s internationall transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.
13. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:
a. the expected percentage change in the currency for the next day.
b. the standard deviation of the daily percentage changes in the currency over a previous period.
c. the current level of interest rates.
d. the confidence level used.
14. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
a. put option
c. call option
d. none of the above
15. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text
d. money market
16. A ____ is not normally used for hedging long-term transaction exposure
a. long-term forward contact
b. futures contract
c. currency swap
d. parallel loan
17. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a. receivable; purchase
b. payable; sell
c. payable; purchase
d. none of the above
18. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues
19. ____ exposure occurs when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial statements.
d. None of the above
20. Managing economic exposure is generally perceived to be ____ managing transaction exposure.
a. more difficult than
b. less difficult than
c. just as difficult as
d. none of the above
21. Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.
a. tax deductible; not taxed.
b. not tax deductible; not taxed.
c. not tax deductible; taxed.
d. tax deductible; taxed
22. ___ is not a revenue-related motive for direct foreign investment.
a. Attracting new sources of demand
b. Fully benefiting from economies of scale
c. Exploiting monopolistic advantages
d. Entering profitable markets
23. Procedural and documentation requirements imposed by the foreign government are referred to as:
a. regulatory barriers.
b. industry barriers.
c. protective barriers.
d. “red tape” barriers.
24. Based on the text, it should be obvious that markets are ____ in reality, and consequently, monopolistic advantages ____ be exploited.
a. perfect; may possibly
b. perfect; cannot
c. imperfect; may possibly
d. imperfect; cannot
25. The best means to accomplish the revenue-related motive of attracting new sources of demand is to:
a. acquire a competitor that has controlled its local market.
b. establish a subsidiary or acquire a competitor in a new market.
c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.
d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.
26. 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
27. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
d. none of the above, as the firm is not exposed
28. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low
29. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be ____ affected by the project.
a. adversely; adversely
b. favorably; adversely
c. favorably; favorably
d. adversely; favorably
30. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
31. Potential targets in countries where economic conditions are ____ are more likely to experience strong demand for their products in the future and may generate ____ cash flows.
a. strong; lower
b. weak; higher
c. weak; lower
d. strong; higher
32. U.S. firms acquire more target firms in ____ than in any other country.
d. United Kingdom
33. According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.
a. the United Kingdom
34. According to your text, all of the following are factors to be considered in an international acquisition, except
a. the target’s willingness to be acquired.
b. the target’s previous acquisition history.
c. the target’s previous cash flows.
d. the target’s local economic conditions.
35. Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC’s product.
a. increase; increase
b. reduce; reduce
c. increase; reduce
d. reduce; increase
36. The primary purpose of country risk analysis when applied to capital budgeting is usually to:
a. measure the effect of country risk on sales.
b. measure the effect of country risk on cash flows.
c. measure the effect of country risk on the consolidated balance sheet.
d. measure the effect of country risk on the consolidated income statement.
37. Which of the following is not a technique to assess country risk?
a. Gamma technique
b. Delphi technique
c. checklist approach
d. inspection visits
38. ____ is not a political risk factor.
a. High interest rates in a foreign country
b. Currency inconvertibility
39. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to your text?
a. exchange rate risk.
c. access to international capital markets.
d. international diversification.
40. One argument for why subsidiaries should be only partly-owned by the parent is:
a. that the potential conflict of interests between the MNC’s managers and shareholders is avoided.
b. that the potential conflict of interests between the MNC’s majority shareholders and minority shareholders is avoided.
c. that the potential conflict of interests between the MNC’s existing creditors is avoided.
d. to motivate subsidiary managers by allowing them partial ownership.
41. Which of the following is not a reason provided in the text regarding why the cost of debt can vary across countries?
a. differences in the risk-free rate.
b. a high price-earnings multiple.
c. differences in the risk premium.
d. differences in demographics.
42. __ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
a. Private placements
b. Domestic equity offerings
c. Global equity offerings
d. Global debt offerings
43. The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local firms where the MNC’s subsidiary is based.
b. average capital structure of local firms where the MNC’s parent is based.
c. desired capital structure of a subsidiary of a particular MNC.
d. desired capital structure of a particular MNC overall (including all subsidiaries).
44. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise this right if interest rates ____ substantially.
a. floating-rate; rise
b. floating-rate; fall
c. fixed-rate; rise
d. fixed-rate; fall
45. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase as the dollar ____.
a. a foreign currency; weakens
b. dollars; strengthens
c. a foreign currency; strengthens
d. dollars; weakens
46. 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 subisidiary
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
47. A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:
a. issuing Swiss franc-denominated bonds.
b. purchasing Swiss franc-denominated bonds.
c. purchasing U.S. dollar-denominated bonds.
d. issuing U.S. dollar-denominated bonds.
48. Which of the following is not a payment method used for international trade?
a. issuing Swiss franc–denominated bonds.
b. purchasing Swiss franc–denominated bonds.
c. purchasing U.S. dollar–denominated bonds.
d. issuing U.S. dollar–denominated bonds.
49. ___ is not a type of program offered by Ex-Imbank.
c. Currency swap insurance
d. Bank insurance
50. A ____ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.
b. bill of lading
c. trade acceptance
d. letter of credit
51. Under a letter of credit arrangement, the bank issuing the letter of credit is known as the ____ bank, the correspondent bank in the beneficiary’s country to which the issuing bank sends the letter of credit is known as the ____ bank, and the bank that agrees to examine documents under the letter of credit and pay the beneficiary is called the ____ bank.
a. issuing; negotiating; advising
b. issuing; advising; negotiating
c. advising; issuing; negotiating
d. negotiating; issuing; advising
52. Who bears the payment risk in a letter of credit?
a. the exporter.
b. the importer.
c. the issuing bank.
d. both the exporter and importer.
53. The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.
a. lower; low
b. lower; high
c. higher; high
d. higher; low
54. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been:
c. positive, but lower than the interest rate of their respective countries.
d. higher than the interest rate of their respective countries
55. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
a. borrowing domestically.
b. borrowing a portfolio of foreign currencies that are not highly correlated.
c. borrowing a portfolio of foreign currencies that are highly correlated.
d. borrowing two foreign currencies that are negatively correlated
56. The effective financing rate:
a. adjusts the nominal interest rate for inflation over the period of concern.
b. adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern.
c. adjusts the nominal rate for a change in foreign interest rates over the period of concern.
d. adjusts the nominal rate for the forward discount (or premium) over the period of concern
57. If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage is feasible for investors residing in the ____ country.
a. premium; home
b. discount; home
c. premium; foreign
d. B and C
58. The international Fisher effect suggests that:
a. the effective yield on short-term foreign securities should, on average, equal the yield on short-term domestic securities.
b. the effective yield on short-term securities of high-inflation countries is greater than the yield on short-term domestic securities.
c. if domestic income grows faster than foreign income, the effective yield on short-term foreign securities is higher than the yield on short-term domestic securities.
d. if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.
59. 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.
60. Netting can achieve all but one of the following:
a. Cross-border transactions between subsidiaries are reduced.
b. Transaction costs are reduced.
c. Currency conversion costs are reduced.
d. Transaction exposure is eliminated.
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