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120 terms

INT FIN MAN Exam 1

STUDY
PLAY
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