Reference no: EM13750664

1. When performing capital budgeting analysis on international projects, managers

• find it more difficult to estimate the incremental cash flows for foreign projects
• have to deal with foreign exchange rate risk on international capital investments.
• must incorporate a country risk premium when evaluating foreign business activities.
• All of the above.

2. A European quote is the same as

• an American quote.
• an indirect quote.
• a direct quote.
• a cross quote.

3. Which one of the following statements about Eurobonds is NOT true?

• Multinational firms can use Eurobonds to finance international or domestic projects.
• Eurobonds are bearer bonds and do not have to be registered.
• Eurobonds are bonds that have to be registered.
• Eurobonds also pay interest annually.

4. Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that country's currency is called a

• Eurobond.
• municipal bond.
• foreign bond.
• currency bond.

5. The major participants in the foreign exchange markets are

• multinational commercial banks, large investment banking firms, and domestic firms.
• multinational commercial banks, local banks and domestic firms.
• multinational commercial banks, large investment banking firms, and small currency boutiques that specialize in foreign exchange transactions.
• None of the above

6. The ways that a foreign government can adversely affect the risk of a foreign project include allEXCEPT:

• Change tax laws in a way that adversely impacts the firm.
• Impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms.
• Remove tariffs and quotas on any imports.
• Disallow any remittance of funds from the subsidiary to the parent firm for either a limited period of time or the duration of the project.

7. Hedging:Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar.

• $24,687
• $803,838
• $779,152
• $31,278

8. Spot rate: Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say that

• the U.S. dollar is at a forward premium against the yen.
• the yen is at a forward premium against the U.S. dollar.
• the yen is at a forward discount against the U.S. dollar.
• the dollar is at neither a premium nor a discount against the yen.

9. Hedging: Palermo Corp. sold equipment to a French firm. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar.

• $124,687
• $118,418
• $159,023
• $131,278

10. Which of the following economic benefits do the foreign exchange markets provide?

• A mechanism to transfer purchasing power via exports and imports.
• A mechanism for hedging the risk associated with currency fluctuations.
• A channel for businesses to acquire credit for international transactions.
• All of these.

11. If the foreign exchange rate is the price in dollars for a foreign currency, then the exchange rate quote is called:

• a European quote
• an indirect quote
• a direct quote
• a cross quote

12. Bartman Corporation observes that the Swiss franc (SF) is being quoted at $0.6164/SF, while the Swedish krona (SK) is quoted at $0.1981/SK. What is the SK/SF cross rate?

• SK3.1116/SF
• SK0.3214/SF
• SK2.1467/SF
• SK0.4183/SF

13. Given that the spot rate is $1.5276/€ and the 90-day forward quote is $1.5174/€, we can say that:

• the dollar is at neither a premium nor a discount against the euro
• the U.S. dollar is at a forward discount against the euro
• the euro is at a forward premium against the U.S. dollar
• the U.S. dollar is at a forward premium against the euro

13. All of the following represent differences between Eurobonds and domestic US bonds except that

• many Eurobonds are sold without credit ratings.
• Eurobonds pay coupon interest annually.
• Eurobonds are issued as bearer bonds and do not have to be registered.
• investors in Eurobonds regularly pay taxes on the interest they receive.

14. All other things remaining constant, if the US$/£ exchange rate changes from $1.65/£ to $1.45/£ , which of the following will occur?

• Demand for British goods will decrease.
• None of these.
• Demand for British goods will increase.
• British demand for US goods will decrease.

15. Which of the following statements regarding the forward rate is false?

• The forward rate is what one party agrees to pay for money in the future.
• The forward rate is established on the day that the agreement is made and defines the exchange rate that will be used in the future.
• Forward rates are important because business transactions may extend over long periods.
• The forward rate quoted on a particular date is very often equal to the spot rate on the same day.

16. All of the following represent differences between Eurobonds and domestic US bonds except that

• Eurobonds pay coupon interest annually.
• investors in Eurobonds regularly pay taxes on the interest they receive.
• Eurobonds are issued as bearer bonds and do not have to be registered.
• many Eurobonds are sold without credit ratings.