INT FIN MAN Exam 1

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Historically, the primary motive for U.S. multinationals to produce abroad has been to

respond more quickly to the marketplace

The primary objective of the multinational corporation is to

maximize shareholder wealth

____________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy.

arbitrage

The value of good financial management is ___________ in the global markets because of the much greater probability of market imperfections and multiple tax rates.

enhanced

When a firm operates globally it offers advantages such as

greater negotiating power with labor unions

The prime transmitter of global competitive forces is the

the multinational corporation

___________ were the earliest multinationals.

raw-material seekers

The ___________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets.

market seekers

___________ are a recent category of multinationals that seek out and invest in lower cost production sites overseas.

Cost minimizers

Which one of the following is a consequence of increased global competition?

increased anxiety among workers in the old industrial countries

The defenders of multinationals believe that __________ are the appropriate reward for efficiently providing the global economy with products and services.

profits

International ________ can reduce the volatility of an investment portfolio because national financial markets tend to move independently of each other

diversification

Into which category of multinational is IBM most likely to fall?

market seeker

Which one of the following did NOT accelerate the growth of the global economy in the past decade?

The Southeast Asia Currency Crisis

The multinational financial system enables companies to

d. all of the above
a. avoid currency controls
b. reduce taxes
c. access lower cost financing sources

An alternative to the set up of an production facility overseas is to license a local firm to manufacture the company's products. One disadvantage of this method is

The establishment of a competitor with loss of future revenues to the licensing firm

Which of the following is an example of reverse foreign investment for the U.S.?

Honda builds a factory in Ohio

Which of the following is NOT a failing of the theory of comparative advantage?

it deals with trade only differentiate rather than undifferentiated products

Which of the following theories identifies specialization as the main reason for international business activity?

doctrine of comparative advantage

Critics of the multinational corporation would NOT fault its tendency to

engage in environmental protection measures

Multinational firms would most likely be

less risky than domestic firms if the added risks of operating overseas are more than offset by the ability to operate in nations whose economic cycles are not perfectly in phase

According to the capital asset pricing model

only the systematic component of risk affects the required return

The internationalization process most likely tends to

begin by exporting

According to the efficient market hypothesis, which one of the following is NOT correct?

markets place a premium on the future

Which one of the following provides strong evidence that internationalization continues to grow in the world economy?

the growing volume of foreign direct investment by U.S. as well as other multinational companies

For the multinational corporation, which one of the following complements to the integration of world wide operations is MOST critical?

flexibility

According to Shapiro, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that

Makes decisions that anticipates problems and provides solutions that enhances the firm's prospects for growth

The explanation for the rise of the U.S. dollar during the early 1980s is that

the U.S. budget deficit raised U.S. interest rates

The U.S. dollar weakened during the 1970s because

U.S. inflation accelerated

Exchange rates depend on

d. a and b
a. relative inflation rates
b. relative interest rates

Beginning in 1997, the ruble came under attack by speculators and resulted in accelerating

capital flight

During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in

Thailand

The asset market view of exchange rate determination says that the spot rate

c. both a and b
a. should follow a random walk
b. is affected primarily by a nation's long run economic prospects

When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention.

unsterilized

When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n) ________ operation.

open market

Under which one of the following systems is there no central bank?

Currency board

On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM?

7.69%

Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real?

67%

If the French euro devalued by 17% against the U.S. dollar, this is equivalent to a revaluation of the dollar against the euro by

20.48%

If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by

11.11%

If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by

100%

If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by

60%

If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against the dinar by

82%

If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by

400%

If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the U.S. dollar

20%

If a foreigner purchases a U.S. government security

the demand for dollars rises

The price of foreign goods in terms of domestic goods is called

the real exchange rate

An increase in the real exchange rate will

make a country less competitive in international trade

A slowdown in U.S. economic growth will

lower the value of the dollar because the U.S. will be a less attractive place to invest in

The willingness of people to hold money

b and c only
b. rises with price stability
c. rises with national income

Sound economic policies will

raise the value of a nation's currency by boosting the economy

Large government budget deficits will

historical experience shows no correlation between government budget deficits and the value of the nation's currency

Which type of money is MOST likely to see its value fluctuate in the foreign exchange market?

fiat money

An increase in the supply of U.S. dollars by the Federal Reserve will

reduce the value of the dollar because of inflation fears in the United States

2.28 Which one of the following is probably the best advice for governments when it comes to exchange rate arrangements?

There is no substitute for good macroeconomic policy.

Which of the following is an example of foreign exchange market intervention?

the Japanese central bank sells yen in the foreign exchange market to prop up the value of the yen

During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen?

31.25%

Which one of the following effects would MOST likely be caused by a government artificially holding its currency value down?

a massive rise in foreign exchange reserves

The ________ is an exchange rate system that is relatively free from central bank and other government interventions.

clean float

When government intervention attempts to reduce for exporters and importers the uncertainty caused by disruptive exchange rate changes for the short and medium term, it is referred to as _________.

leaning against the wind

Under a _________, countries adjust their national economic policies to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates.

target-zone agreement

________ is nonconvertible paper money backed only by faith that the monetary authorities will not issue more money.

Fiat money

Under the classic gold standard, if prices began rising in the U.S.

gold would flow out of the U.S. and the U.S. money supply would drop

The Bretton Woods system

ended in 1971

The current exchange rate system can best be characterized as a

hybrid system

Managed floats would NOT fall into which of the following categories of central bank intervention?

target-zone arrangements

The European Monetary System is best described as a

target zone arrangement

A weak peso is most likely to cause

less unemployment but more inflation in Mexico

The Bretton Woods system fell apart because

U.S. monetary policy was too expansionary

The gold standard was dissolved in 1973 because

d. a and b only
a. the U.S. printed too many dollars to maintain gold at $35/oz
b. some countries preferred to hold gold instead of dollars

The rising dollar in the early 1980s can be attributed to

d. a and b only
a. high real interest rates in the United States
b. improved investment prospects in the United States

The fall of the dollar beginning in 1985 can be attributed to

the slowdown in U.S. economic growth relative to growth overseas

The characteristic of gold that is most important to the success of a gold standard is that it is

expensive to produce

A gold standard ensures a long run tendency toward price stability because

the cost of producing an ounce of gold stays relatively constant overtime

Calls for a new gold standard reflect

fundamental distrust of government's willingness to maintain the integrity of fiat money

Under the gold standard

the long run stability of the price level includes alternating periods of inflation and deflation

Under a fixed rate system, a country that followed policies that would lead to a higher rate of inflation than that experienced by its trading partners would

experience a balance of payments deficit as its goods became more expensive

Under a fixed rate system, a country that followed policies leading to a lower inflation rate than that experienced by its trading partners would

come under pressure to expand its money supply

Underlying the emerging markets currency crises is a fundamental conflict among policy objectives that the target nations have failed to resolve. Which one of the following is NOT?

IMF bailouts

In a fixed rate system, central banks maintain currency values by

buying undervalued currencies in the foreign exchange market

Governments intervene in the foreign exchange markets for all of the following except to

earn foreign exchange

Under a fixed rate system, which of the following four alternatives to devaluation is MOST likely to succeed?

austerity

In order to boost the value of the euro relative to the dollar

the Fed should sell dollars for euros and the European central bank should buy DM with dollars

A currency is said to be at a forward _________ if the forward rate is below the spot rate.

discount

The theory of relative purchasing power parity states that, between two nations, the

exchange rate difference reflects the inflation rate difference

The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium.

nominal interest rate

A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation's exchange rate and with a rise of its interest rate relative to foreign interest rates. The two conditions combined result in the _________ Effect.

International Fisher

Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is

$.00102

If the expected inflation rate is 5% and the real required return is 6%, then the Fisher effect says that the nominal interest rate should be

11.3%

The inflation rates in the U.S. and France are expected to be 4% per annum and 7% per annum, respectively. If the current spot rate is $.1050, then the expected spot rate in three years is

$.0964

If inflation in the U.S. is projected at 5% annually for the next 5 years and at 12% annually in Italy for the same time period, and the lira/$ spot rate is currently at L2400 = $1, then the PPP estimate of the spot rate five years from now is

3314

If expected inflation is 20% and the real required return is 10%, then the Fisher effect says that the nominal interest rate should be exactly

32%

Annual inflation rates in the U.S. and Greece are expected to be 3% and 8%, respectively. If the current spot rate for the drachma is $.007, then the expected spot rate in three years is

$.00607

If a country's freely floating currency is undervalued in terms of purchasing power parity, its capital account is likely to be

in deficit or tending toward a deficit

If the average rate of inflation in the world rises from 5% to 7%, this will tend to make forward exchange rates move toward

no change on average

A 150% real return in Brazil is higher than a 15% dollar return in the U.S.

it depends on whether these are nominal or real returns

Annual inflation rates in the U.S. and Italy are expected to be 4% and 7%, respectively. If the current spot rate is $1 = L2,000, then the expected spot rate for the lira in three years is

$.0004591

Annual inflation rates in the U.S. and France are expected to be 4% and 6%, respectively. If the current spot rate is $.1250/FF, then the expected spot rate in two years is

$.1203

Suppose five year deposit rates on Eurodollars and Euromarks are 12% and 8%, respectively. If the current spot rate for the mark is $0.50, then the spot rate for the mark five years from now implied by these interest rates is

.5997

The direct spot quote for the Canadian dollar is $.76 and the 180 day forward rate is $.74. The difference between the two rates is likely to mean that

prices in Canada are expected to rise more rapidly than in the U.S.

The spot rate on the Dutch guilder is $0.39 and the 180 day forward rate is $0.40. The difference between the spot and forward rates means that

interest rates are higher in the U.S. than in the Netherlands

Suppose the price indexes in Mexico and the U.S., which both began the year at 100, are at 160 and 103, respectively, by the end of the year. If the exchange rate began the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1, then the change in the real value of the peso (a " " indicates a real devaluation) during the year is

18.5%

Suppose the spot rates for the pound, mark, and Swiss franc are $1.20, $.32, and $.40, respectively. The associated 90 day interest rates (annualized) are 16%, 8%, and 4%, while the U.S. 90 day interest rate is 12%. What is the 90 day forward rate (to the nearest cent) on a TCU (TCU 1 = £1 + DM1 + SFr1) if interest parity holds?

$1.92

The current five year Euroyen rate is 6% per annum (compounded annually). The five year Eurodollar rate is 8.5%. What is the implied forward premium or discount of the yen (over the current spot rate) for a five year forward contract?

12.36% premium

Suppose the spot rates for the pound, mark, and Swiss franc are $1.50, $.42, and $.48, respectively. The associated 90 day interest rates (annualized) are 12%, 6%, and 4%, while the U.S. 90 day interest rate (annualized) is 8%. What is the 90 day forward rate on a DCU (DCU 1 = £1 + DM1 + SFr1) if interest parity holds?

$2.3923

Suppose that spot pounds are selling at $1.7342, while 90 day forward pounds are selling at $1.7156. At the same time, DM spot and 90 day forward rates are $0.6138 and $0.6014, respectively. According to these quotes the

pound is selling at a 3.87% forward discount relative to the DM

If annualized interest rates in the U.S. and France are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180 day forward rate will interest rate parity hold?

$.1088

If annualized interest rates in the U.S. and Switzerland are 10% and 4%, respectively, and the 90 day forward rate for the Swiss franc is $.3864, at what current spot rate will interest rate parity hold?

$.3807

The spot rate on the euro is $1.40 and the 180 day forward rate is $1.50. The difference between the two rates means

interest rates are higher in the U.S. than in the European Union

Suppose the spot rates for the pound, mark, and Swiss franc are $1.30, $.35, and $.40, respectively. The associated 90 day interest rates (annualized) are 16%, 8%, and 4%, while the U.S. 90 day interest rate (annualized) is 12%. What is the 90 day forward rate on an ACU (ACU 1 = £1 + DM1 + SFr1) if interest parity holds?

$2.0489

The current five year Euroyen and Eurodollar rates are 8% and 12.5% per annum, respectively. What is the implied forward premium or discount of the yen (over the current spot rate for a five year forward contract)?

22.64% premium

The 90 day interest rates (annualized) in the U.S. and Japan are, respectively, 10% and 7%, while the direct spot quote for the yen in New York is $.004300. At what 90 day forward rate would interest rate parity hold?

.004332

If annualized interest rates in the U.S. and France are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180 day forward rate will interest rate parity hold?

$.1088

Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the end of the year. Inflation during the year is 15% in England and 5% in the U.S. What is the real devaluation ( ) or real revaluation (+) of the pound during the year?

12.38%

Suppose the price indexes in Spain and the U.S., which both began the year at 100, are at 117 and 105, respectively, by the end of the year. If the beginning and ending exchange rates, respectively, for the peseta are $.1320 and $.1125, then the change in the real value of the peseta (a " " indicates a real devaluation) during the year is

5.0%

Suppose the Swiss franc revalues from $0.40 at the beginning of the year to $0.44 at the end of the year. U.S. inflation is 5% and Swiss inflation is 3% during the year. What is the real devaluation ( ) or real revaluation (+) of the Swiss franc during the year?

+ 7.9%

Suppose the value of the Polish zloty moves from Z 1000 = $1 at the start of the year to Z 1,800 at the end of the year. At the same time, the Polish price level changes from an index of 100 on January 1 to 134 on December 31. U.S. inflation during the year was 4.5%. If the one-year interest rate on the zloty is 44%, what was the real dollar cost of borrowing the zloty during the year?

-23.44%

Suppose inflation rates in the U.S. and France are expected to be 4% and 9%, respectively, next year and 6% and 7%, respectively, in the following year. If the current spot rate is $.1050, then the expected spot value of the franc in two years is

$.0992

Suppose the Deutsche mark revalues from $.30 at the beginning of the year to $.33 at the end of the year. Inflation during the year is 5% in the U.S. and 3% in Germany. What is the real devaluation ( ) or real revaluation (+) of the Deutsche mark during the year?

+ 7.9%

If the U.S. trade balance with Japan is expected to go from a deficit this year to a surplus next year, the forward rate on yen would

could be either above or below the spot rate

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