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Exam 27: Multinational Financial Management

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Question 21

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Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

A) True
B) False

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Question 22

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Which of the following are reasons why companies move into international operations?

A) To take advantage of lower production costs in regions of inexpensive labor.
B) To develop new markets for their finished products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) All of the above.

F) A) and B)
G) A) and C)

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Question 23

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If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

If one U.S. dollar buys 1.64 Canadian, how many U.S. dollars can you purchase for one Canadian dollar?

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British pound to depreciate against the U.S. dollar.

Multinational financial management requires that

If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Exchange rate quotations consist solely of direct quotations.

Which of the following statements is false?

One British pound can purchase 1.82 U.S. dollars today in the foreign exchange market and currency forecasters predict that the U.S. dollar will depreciate by 12 percent against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

In 1985, a particular Japanese imported automobile sold for 1,476,000 yen or $8,200. If the car still sells for the same amount of yen today but the current exchange rate is 144 yen per dollar, what is the car selling for today in U.S. dollars?

In the spot market, 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6 percent (and therefore have a 6-month periodic return equal to 3 percent) . 6-month U.S. securities have an annualized return of 6.5 percent and a periodic return of 3.25 percent. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?

Solartech Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Solartech agreed to make the bill payable in yen, thus agreeing to take on exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Solartech actually receive after it exchanged yen for U.S. dollars?

Sunware Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved in U.S. dollars by hedging its exchange rate exposure?

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Calculating a currency cross-rate involves determining the exchange rate for two currencies by using a third currency as a base.

A foreign currency will, on average, depreciate against the dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.