Choice and True/False
1. The current currency in Italy is
2. A Forward contract:
3. If the US Dollar appreciates compared
to the Euro:
4. All else equal, if the Fed increases
5. 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
force the value of the pound to appreciate against the dollar, the Federal Reserve
strong dollar is normally expected to cause:
value of the Canadian dollar, Japanese yen, and Australian dollar with respect
to the U.S. dollar are part of a:
Graylon, Inc., based in Washington, exports products to a German firm and will
receive payment of €200,000 in three months. On June1, the spot rate of the
euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon
negotiated a forward contract with a bank to sell €200,000 forward in three
months.The spot rate of the euroon September 1 is $1.15. Graylon will receive
$_________ for the euros.
demand for U.S. exports tends to increase when:
of the following theories identifies specialization as a reason for
12. As a
result of the European Union, restrictions on exports between _______ were
reduced or eliminated.
of the following is an example of direct foreign invest¬ment?
of the following industries would most likely take advantage of lower costs in
some less developed foreign countries?
foreign investment into the U.S. represents a ________.
16. Suppose the United States and Great
Britain are on the gold standard and the price of gold in the U.S. is fixed at
$100 per ounce and the price of gold in Britain is fixed at £50. What exchange
rate must prevail between the dollar and the pound?
Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to
$.35. The value of the Peruvian Sol in
Canadian dollars is:
of the following is not true with respect to spot market liquidity?
_________ is not a factor that causes currency supply and demand schedules to change.
advantage of monetary union
large increase in the income level in Mexico along with no growth in the U.S.
income level is normally expected to cause (assuming no change in interest
rates or other factors) a(n) ______ in Mexican demand for U.S. goods, and the
Mexican peso should _______.
forward contract can be used to lock in the __________ of a specified currency
for a future point in time.
the “real” interest rate is relatively low in a given country, then the
currency of that country is typically expected to be:
Currency futures contracts sold on an exchange:
of the following is the most likely strategy for a U.S. 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)?
you expect the euro to depreciate, it would be appropriate to _______ for
U.S. inflation suddenly increased while European inflation stayed the same,
there would be:
29. Countries that have adopted the euro must
agree on a single ________ policy.
30. It has been argued that the exchange rate
can be used as a policy tool. Assume that the U.S. government would like to
reduce unemployment. Which of the following is an appropriate action given this
Assume a two country world: Country A
and Country B. Which of the following is
correct about purchasing power parity (PPP) as related to these two countries?
on interest rate parity, the larger the degree by which the foreign interest
rate exceeds the U.S. interest rate, the:
interest rates on the euro are consistently below U.S. interest rates, then for
the international Fisher effect (IFE) to hold:
Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based
multinational firm’s reported earnings (from the consolidated income statement)
to _______. If a firm desired to protect
against this possi¬bility, it could stabilize its reported earnings by _______
euros forward in the foreign exchange market.
36. If revenues and costs are equally
sensitive to exchange rate movements, MNCs may reduce their economic exposure
by restructuring their operations to shift the sources of costs or revenues to
other locations so that:
37. When a foreign currency is perceived by a
firm to be undervalued, the firm may consider direct foreign investment in that
country, as the initial outlay should be relatively low.
38. 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.
39. If a
U.S. parent is setting up a French subsidiary, and funds from the subsidiary
will be periodically sent to the parent, the ideal situation from the parent’s
perspective is a ____ after the subsidiary is established.
40. Like income tax treaties, ____________
help to avoid double taxation and stimulate direct foreign investment.
41. When a foreign subsidiary is not wholly
owned by the parent and a foreign project is partially financed with retained
earnings of the parent and of the subsidiary, then:
42. The dominant world currency since the end
of World War II has been the
Consider a country that presently has a high level of unemployment because of
weak economic conditions. Its income levels are very low. This country
may be an attractive target as a result of ______ motives by U.S. firms that engage in direct
of the following is a reason to consider interna¬tional business?
Direct foreign investment would typically be welcomed if:
macro assessment of country risk:
MNC has a foreign manufacturing plant to capitalize on cheap production costs;
the MNC exports all the goods pro¬duced.
It should be most concerned about the country’s:
48. Country risk can affect an MNC’s cash
flows but cannot affect its cost of capital.
49. When entering into a forward contract,
the forward rate usually contains a premium (or discount) that reflects the
50. Transaction exposure
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