MBA 7427 Sample Multiple Choice Questions (Chapters 1-4)

Please use these questions to better understand the concepts underlyingthese questions.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

__C__ 1. A "good" (or ideal) international monetary system should provide:

a. liquidity, elasticity, and flexibility
b. elasticity, sensitivity, and reliability
c. liquidity, adjustments, and confidence
d. none of the above

__D__ 2. Privatization refers to process of:

a. Having government operate businesses for the betterment of the public sector
b. Government allowing the operation of privately owned business
c. Prohibiting government operated enterprises
d. A country divesting itself of the ownership and operation of a business venture by
turning it over to the free market system
__C__ 3. Market imperfections include all of the following except:
a. Taxes on imported goods
b. Taxes on exported goods
c. Stock markets
d. Two different classes of shareholders for one company

__C__ 4. The theory of comparative advantage:

a. Claims that economic well-being is enhanced if each country's citizens produce
only a single product
b. .Claims that economic well-being is enhanced when all countries compare
commodity prices after adjusting for exchange rate differences in order to
standardize the prices charged all countries
c. Claims that economic well-being is enhanced if each country's citizens produce
that which they have a comparative advantage in producing relative to the citizens
of other countries, and then trade production
d. Claims that no country has an absolute advantage over another country in the
production of any good or service
__D__ 5. A multinational firm can be defined as:
a. A firm that invests short-term cash inflows in more than one currency
b. A firm that has sales affiliates in several countries
c. A firm that is incorporated in more than one country
d. A firm that incorporated in one country that has production and sales operations in
several other countries
__C/D__6. Recent trends in the globalization of the world economy include all of the following except:
a. Emergence of global financial markets
b. Economic differentiation
c. Advent of the euro
 d. Advent of the euro

__D__ 7. Political risk includes all of the following except:

a. Expropriation
b. Unexpected changes in tax rules
c. Change in government
d. Unexpected changes in environmental rules

____ 8. GATT, the General Agreement on Tariffs and Trade, has been successful in:
a. reducing import tariffs worldwide by an average of 98%.
b. .reducing import tariffs worldwide by an average of 78%.
c. .reducing import tariffs worldwide by an average of 58%.
d. .reducing import tariffs worldwide by an average of 38%.

__D__ 9. The common monetary policy for the euro zone is now formulated by
a. the Bundesbank in Germany.
b. the Federal Reserve Bank.
c. the World Bank.
d. the European Central Bank.

__D__ 10. The international monetary system can be defined as the institutional framework within which:
a. The international monetary system can be defined as the institutional framework
within which:
b. movements of goods are accommodated
c. interest rates of countries are determined
d. exchange rates among currencies are determined

__B__ 11. The international monetary system went through several distinct stages of evolution. These stages
are summarized, in alphabetic order, as follows:
]\(i)- Bimetallism
(ii)- Bretton Woods system
(iii)- Classical gold standard
(iv)- Flexible exchange rate regime
(v)- Interwar period
The (chronological) order that they actually occurred is:
a. (iii), (i), (iv), (ii), and (v)
b. (i), (iii), (v), (ii), and (iv)
c. (vi), (i), (iii), (ii), and (v)
d. (v), (ii), (i), (iii), and (iv)

__D__ 12. Under the Bretton Woods system,

a. there was an explicit set of rules about the conduct of international trade policies
b. each country was responsible for maintaining its exchange rate within 2.50 percent
of the adopted par value by buying or selling foreign exchanges as necessary
c. the U.K. sterling pound was the only currency that was fully convertible to gold
d. each country established a par value in relation to the U.S. dollar, which was
pegged to gold at $35 per ounce.
Crawling pegs 13. The exchange rate arrangement in which the currency is adjusted periodically in small
amounts at a fixed, preannounced rate or in response to changes in selective quantitative indicators is
called
a. Currency Board
b. Pegged Exchange rate within horizontal bands
c. Pegged Exchange rate within horizontal bands
d. Exchange rate within crawling bands

__D__ 14. Special Drawing Rights (SDR) is:

a. used to make international payments to non-member of the International Monetary
Fund (IMF).
b. a "portfolio" of currencies, and its value tends to be more instable than the
currencies that it is comprised of.
c. used in addition to gold and foreign exchanges, to make domestic payments.
d. a basket currency comprising major individual currencies allotted to the members
of the IMF, who could then use SDRs for transactions among themselves or with
IMF.
__A__ 15. Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounce of gold is
worth FF12. Under the gold standard, any misalignment of the exchange rate will be automatically
corrected by cross border flows of gold. Calculate the possible savings for buying FF1,000, if the
British pound becomes undervalued and trades for FF1.80/£. (Assume zero shipping costs).
(Hint: Gold is first purchased using the devalued British pound from the Bank of England, then
shipped to France and sold for FF1,000 to the Bank of France).
a. £55.56
b. £65.56
c. £75.56
d. £85.56

__D__ 16. If, under the Gold Standard, the price of 1oz of gold was $15 or £5, what was the $/£ exchange rate?
a. $0.25/£
b. $0.33/£
c. $1/£
d. $3/£

__A__ 17. The key arguments for flexible exchange rates are:
a. Easier external adjustments and national policy autonomy
b. Easier internal adjustments and national policy autonomy
c. Easier external adjustments and easier international trade
d. Easier internal adjustments and easier international trade

__A__ 18. It is said that the gold-exchange system was programmed to collapse in the long run. To satisfy the
growing need for reserves, the United States had to run balance-of-payments deficits continuously.
Yet, if the United States ran perennial balance-of-payments deficits, it would eventually impair the
public confidence in the dollar. This dilemma was known as the
a. Triffin paradox
b. Triffin dilemma
c. Mundell paradox
 d. Mundell dilemma

__B__ 19. Balance of payment

a. records a country's commerce with one other country
b. provides detailed information concerning the demand and supply of a country's
currency
c. cannot be used to evaluate the performance of a country in international economic
competition
d. may or may not balance

__C__ 20. A country's international transactions can be grouped into the following three main types:
a. Current Account, Medium term Account, and Long term Account
b. Current Account, Long term Account, and Capital account
c. Current Account, Capital Account, and Reserve Account
d. Capital Account, Reserve Account, Trade Account

__C__ 21. Invisible trade refers to

a. services that avoid tax payments
b. underground economy
c. legal, consulting, and engineering services
d. tourist expenditures, only

__D__ 22. FDI is a part of

a. BKA
b. BRA
c. BCA
d. IMF

__B__ 23. The "J-curve effect" shows:

a. the initial improvement and the eventual depreciation of a country's trade balance
following a currency depreciation
b. the initial deterioration and the eventual improvement of a country's trade balance
following a currency depreciation
c. the trade balance's lack of responsiveness to the interest rate changes
d. short-term price elasticity of exports and imports to the change in the economic
growth
__D__ 24. Which of the following must be true under the flexible exchange rate regime:
a. BRA = BKA
b. Export = Import
c. A Current Account deficit (surplus) must be matched by a Capital Account deficit
(surplus).
d. A Current Account surplus (deficit) must be matched by a Capital Account deficit
(surplus).
__A__ 25. Foreign direct investment (FDI) occurs:
a. when an investor acquires a measure of control of a foreign business
b. when an investor buys foreign bonds directly
c. with sales and purchases of foreign stocks and bonds that do not involve a transfer
 of control
d. when a company buys foreign government bonds directly

__B__ 26. The reserve account of the Balance of Payments records

a. the stock of foreign exchange held by the public
b. changes in foreign exchange reserves held by the government
c. the stock of gold held by foreign governments
d. changes in foreign exchange reserves held by foreign governments

__A__ 27. Assume that the balance-of-payments accounts for a country are recorded correctly. The results are:
balance on the current account = BCA = $130 billion
balance on the capital account = BKA = -$86 billion
balance on the reserves account = BRA = ?
The balance on the reserves account (BRA), under the fixed exchange regime is
a. -$44 billion
b. $44 billion
c. $216 billion
d. . $0 billion

__D__ 28. The balance on the reserves account (BRA), under the pure flexible exchange regime is:
a. -$44 billion
b. $44 billion
c. . $216 billion
d. . BRA will not be considered.

__A__ 29. PetroCanada exports oil to New York. This transaction will be recorded in the balance of payments
as
a. a credit in the current account
b. debit in the current account
c. credit in the capital account
d. a debit in the capital account
__C__ 30. A Chinese state-owned company buys a Canadian saw mill. This transaction will be recorded in the
balance of payments of Canada as
a. a credit in the current account
b. a debit in the current account
c. a credit in the capital account
d. a debit in the capital account

__A__ 31. Portfolio investment refers to:

a. changes in Canadian holdings of noncontrolling equity in foreign companies
b. changes in Canadian holdings of controlling equity in foreign companies
c. changes in foreign holdings of controlling equity in Canadian companies
d. changes in foreign holdings of controlling stock in Canadian companies

__D__ 32. If a country has a flexible exchange rate system and a deficit on current account
a. the balance of payments must be negative.
b. The balance of payments must be positive.
c. The balance on capital account must be negative.
 d. The balance on capital account must be positive.

__C__ 33. If a country has a flexible exchange rate system and a deficit on capital account
a. the balance of payments must be negative.
b. The balance of payments must be positive.
c. The balance on current account must be positive
d. The balance on current account must be negative

__C__ 34. BMW, a German car manufacturer, opens a new subsidiary in China. This transaction will be
recorded in China's balance of payments as
a. a credit in the current account
b. a debit in the current account
c. a credit in the capital account
d. a credit in the capital account

__B__ 35. The world's largest foreign exchange trading center is:
a. New Youk
b. London
c. Hong Kong
d. Tokyo

__C__ 36. Intervention in the foreign exchange market is the process of:
a. A central bank requiring the commercial banks of that country to trade at a set
price
b. A central bank requiring the commercial banks of that country to trade at a set
price
c. A central bank buying or selling its currency in order to influence its value.
d. The government of a country prohibiting transactions in one or more currencies.

__B__ 37. Most foreign exchange transactions are for:

a. intervention
b. speculation or arbitrage
c. retail trade
d. purchase of currencies

__A__ 38. .Exchange rates are quoted on American terms if:

a. The US dollar is quoted directly
b. The US dollar is quoted indirectly
c. The US dollar is not quoted
d. The US dollar is quoted in the denominator

__C__ 39. If the $/£ bid and ask prices are $1.50 and 1.51, respectively, the corresponding £/$ bid and ask
prices are:
a. £0.6667 and £0.6623
b. $1.51 and $1.50
c. £0.6623 and £0.6667
d. cannot be determined with the information given
____ 40. Which of the following is true given the following quotes for foreign exchange: 1.68-1.70$/£;
1.43-1.45$/€; 1.13-1.15€/£
a. Triangular arbitrage is not possible
b. Triangular arbitrage is possible and it involves exchanging $ for £
c. Triangular arbitrage is possible and it involves exchanging £ for $
d. None of these

____ 41. Which of the following is true if one year forward rate is F = 1.83$/£; current spot rate is S =
1.81$/£; and interest rates are i = 3.5%, and i* = 3% (where exchange rates are quoted in $/£, i is the
interest rate in the U.S. and i* is the interest rate in the U.K.)?
a. Arbitrage is not possible
b. Arbitrage is possible and arbitrage strategy involves buying £ forwards
c. Arbitrage is possible and arbitrage strategy involves selling £ forwards
d. Arbitrage is possible; however, there is not enough information to pick one of the
answers above.
__A__ 42. The SF/$ spot exchange rate is 1.25 and the 180 forward exchange rate is 1.30. Assuming 360 days
in a year, the forward premium (discount) is:
a. The dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days
b. The dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days
c. The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.
d. The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days.

__C__ 43. The S$/$ spot exchange rate is 1.60, the C$/$ spot rate is 1.33 and the S$/C$ 1.15. Determine the
triangular arbitrage profit that is possible if you have $1,000,000.
a. $44,063 profit
b. $46,093 loss
c. $46,093 profit
d. No profit is possible

____ 44. The 3 month forward rate between British pound and the Swiss franc is £0.5/SF. The current spot
rate is £0.51/SF. Assuming 360 days in a year, what is the correct statement from the below?
a. The Swiss franc is trading at a 1.96% premium to the British pound for delivery in
90 days.
b. The Swiss franc is trading at a 7.84% premium to the British pound for delivery in
90 days.
c. The Swiss franc is trading at a 1.96% discount to the British pound for delivery in
90 days
d. The Swiss franc is trading at a 7.84% discount to the British pound for delivery in
90 days
____ 45. The 3 month forward rate between British pound and the Swiss franc is £0.5. A speculator predicts
the spot rate in three months to be £0.51 and has £1,000,000 for speculation. The speculator should
not
a. get a long position on British pounds
b. get a short position on Swiss francs
c. speculate
d. get a long position on Swiss francs
MBA 7427 Sample Questions CH 5

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Interest Rate Parity (IRP) is best defined as:

a. when a government brings its domestic interest rate in line with other major
financial markets.
b. when the central bank of a country brings its domestic interest rate in line with its
major trading partners.
c. a zero arbitrage condition that must hold when international financial markets are
in equilibrium.
d.
None of these

____ 2. When Interest Rate Parity (IRP) holds between two different countries X and Y, your decision to
invest your money will:
a. be indifferent between country X and country Y
b. not involve forward hedging.
c. depend on which country initiated the IRP.
d. not involve the foreign exchange rates.

____ 3. When Interest Rate Parity (IRP) does not hold:

a. there is a high degree of inflation.
b. the financial markets are in equilibrium.
c. there are opportunities for covered interest arbitrage.
d. there are no opportunities for arbitrage.

____ 4. Covered Interest Arbitrage (CIA) activities will result in:

a. unstable international financial markets
b. restoration of equilibrium quite quickly.
c. disintermediation.
d. no changes in the markets.

____ 5. If U.S. nominal interest rate is lower than U.K. interest rate (assuming real interest rate stays same
between the countries), you can say that:
a. US$ is expected to depreciate.
b. US$ is expected to appreciate.
c. PPP is violated but RPPP may be satisfied.
d. RPPP is violated.

____ 6. Uncovered interest rate parity:

a. is an arbitrage condition.
b. holds most of the time.
c. is based on expectations.
d. will provide guaranteed but small profits.

____ 7. Deviations from interest rate parity exist for all of the following reasons except:
 a. transaction costs.
b. spreads.
c. interest rate differentials.
d. capital controls.
____ 8. Purchasing Power Parity (PPP) theory states that:
a. the exchange rate between currencies of two countries should be equal to the ratio
of the countries' price levels.
b. as the purchasing power of a currency sharply declines (due to hyperinflation) that
currency will appreciate against stable currencies.
c. the prices of standard commodity baskets in two countries are not related.
d. the exchange rate between currencies of two countries will not be equal to the ratio
of the countries' price levels.
____ 9. If the PPP is satisfied then:
a. the nominal exchange rate stays constant over time.
b. the nominal exchange rate may depreciate or appreciate over time but the rate of
this depreciation/appreciation stays constant.
c. SP*/P = 1, where S = nominal exchange rate, P* = foreign country price level, P =
home country price level.
d. SP*/P = constant (not necessary 1), where S = nominal exchange rate, P* = foreign
country price level, P = home country price level.
____ 10. Which statement about real exchange rates is not true?
a. Real exchange rate changes are caused by changes in nominal exchange rates.
b. Real exchange rates measure deviations from PPP.
c. Real exchange rates are always unity.
d. Real exchange rates affect the international competitive positions of countries.

____ 11. Germany has a higher rate of inflation than Japan. The nominal exchange rate is constant. In this
scenario, which of the following statement is true?
a. Germany experiences an increase in its real exchange rate.
b. Germany experiences a decrease in its real exchange rate.
c. Japan experiences an increase in its real exchange rate.
d. German goods are cheaper now.

____ 12. International Fisher Effect connects the expected depreciation or appreciation of the currency with:
a. Nominal interest rates.
b. Real interest rates.Inflation levels.
c. Inflation levels.
d. Forward exchange rate.

____ 13. Forward exchange rate.

a. uncovered interest rate parity.
b. covered interest rate parity
c. purchasing power parity.
d. efficient Fisher effect.
____ 14. According to the fundamental approach, if all of the regression coefficients are already estimated, all
of the following matters in the exchange rate determination except:
a. The expected rate of growth of domestic money.
b. The expected rate of growth of foreign money.
c. The historical rate of growth of domestic money.
d. The expected rate of real economic growth in the domestic economy.

____ 15. The main approaches to forecasting exchange rates are:

a. Efficient market, Fundamental, and Technical approaches.
b. Efficient market and Non-Technical approaches.
c. Efficient market and Fundamental approaches only.
d. Fundamental and Non-Technical approaches.

____ 16. If foreign exchange markets are efficient, all of the following will hold except:
a. Exchange rates change only when new information arrives.
b. Exchange rates change randomly
c. Incremental changes of exchange rates depend on the current level of the exchange
rate.
d. The current exchange rate reflects all relevant information.

____ 17. Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,
and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is
$1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the
equivalent of $1,000,000 at the spot exchange rate of $1.12/€). The above mentioned scenario:
a. is an example of covered interest arbitrage (CIA), and interest rate parity (IRP)
holds.
b. is an example of covered interest arbitrage (CIA), and interest rate parity (IRP)
holds.
c. is an example of Purchasing Power Parity (PPP), and hyperinflation.
d. none of these

____ 18. The net cash flow in one year is

a. $10,690.
b. $15,873.
c. $46,207.
d. $21,964.

____ 19. Covered interest arbitrage would not be possible if the forward rate would be:
a. $1.1093/€.
b. $1.1248/€.
c. $1.1362/€.
d. $1.1611/€.

____ 20. If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar
depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially
held, is:
 a. 0.07
b. 0.98
c. 1.05.
d. 1.20

____ 21. Canada's competitive position will:

a. strengthen when the dollar appreciates more than is warranted by PPP.
b. not be affected when the dollar appreciates more than is warranted by PPP.
c. weaken when the dollar appreciates more than is warranted by PPP.
d. weaken when the dollar depreciates more than is warranted by PPP.

____ 22. PPP does not hold well because of the following except:
a. barriers to international commodity arbitrage.
b. the existence of non-tradables.
c. commodity prices are different in different countries.
d. the CPI index is calculated using the same basket of goods.

____ 23. The forward expectations parity states that:

a. any forward premium or discount is equal to the expected change in the exchange
rate.
b. any forward rate is equal to the expected change in the exchange rate.
c. the forward premium or discount is equal to the expected change in the real
exchange rates.
d. the forward premium or discount is equal to the expected change in purchasing
power parity.
MBA 7427 Sample Questions CH 5
Answer Section

MULTIPLE CHOICE

1. ANS: C PTS: 1
2. ANS: A PTS: 1
3. ANS: C PTS: 1
4. ANS: B PTS: 1
5. ANS: B PTS: 1
6. ANS: C PTS: 1
7. ANS: C PTS: 1
8. ANS: A PTS: 1
9. ANS: C PTS: 1
10. ANS: C PTS: 1
11. ANS: A PTS: 1
12. ANS: A PTS: 1
13. ANS: A PTS: 1
14. ANS: C PTS: 1
15. ANS: A PTS: 1
16. ANS: C PTS: 1
17. ANS: B PTS: 1
18. ANS: D PTS: 1
19. ANS: C PTS: 1
20. ANS: B PTS: 1
21. ANS: C PTS: 1
22. ANS: D PTS: 1
23. ANS: A PTS: 1
MBA 7427 Sample Questions CH 6

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The major feature that distinguishes international from domestic banks is:
a. the type of deposits they accept.
b. the currency of denomination of the investments they provide.
c. the interest rate of the loans they make.
d. none of these

____ 2. A country whose banking system is organized to permit external accounts beyond the normal
economic activity of the country is called:
a. representative country
b. offshore banking centre
c. onshore banking centre
d. full service country.

____ 3. A small service facility staffed by parent bank personnel that is designed to assist MNC clients of the
parent bank in dealings with the bank's correspondents is called:
a. Correspondent bank.
b. Representative office.
c. Foreign branch.
d. Subsidiary bank.

____ 4. A locally incorporated bank that is either wholly owned or owned in major part by a foreign parent is
called:
a. Correspondent bank
b. Representative office
c. Representative office
d. Subsidiary bank

____ 5. The amount of equity capital and other securities a bank holds as reserves against risky assets to
reduce the probability of a bank failure is know as:
a. Value-at-risk
b. Bank capital adequacy
c. Negotiable certificate of deposit
d. Eurocurrency reserve

____ 6. The Basle Accord calls for the following minimum bank capital
a. Tier I capital 4%, Tier II capital 4%
b. Tier I capital 4%, Tier II capital 8%
c. Tier I capital 8%, Tier II capital 4%
d. Tier I capital 8%, Tier II capital 8%

____ 7. A loss that will be exceeded with a specific probability over a specified time horizon is called:
a. Capital reserves
b. Systematic risk
 c. Value at risk
d. Money-market risk

____ 8. In reference to capital requirements, value-at-risk analysis:

a. refers to traditional bank loans and deposits.
b. refers to a "general" approach to determine the adequate bank capital.
c. provides a level of confidence measure of the minimum loss that can occur during
a period of time
d. refers to a "risk-focused" approach to determine the adequate bank capital.

____ 9. Eurodollars refers to US dollar deposits when the depository bank is located outside of:
a. Europe
b. Europe, and the Caribbean
c. Europe, the Caribbean, or Asia
d. the United States

____ 10. The London Interbank Offered Rate (LIBOR) is all of the following except:
a. the rate charged by banks on loans to other Eurobanks
b. the rate paid by banks on deposits from other Eurobanks
c. reference rate in London for Eurocurrency deposits
d. reference rate in London for Eurocurrency loans

____ 11. Which of the following statements is not true about Eurocredits?
a. Eurocredits are short-to medium term loans of Eurocurrency extended by
Eurobanks
b. Euorcredits are denominated in currencies other than the home currency of the
Eurobank
c. Eurocredits are often syndicated loans
d. Eurocredits are less risky than other loans

____ 12. A forward rate agreement (FRA) is a contract between two banks:
a. that allows the Eurobank to hedge the interest rate risk in mismatched deposits and
credits
b. in which the buyer agrees to pay the seller the increased interest cost on a notional
amount if interest rates fall below an agreed rate, and the seller agrees to pay the
buyer the increased interest cost if interest rates increase above the agreed rate
c. that is structured to capture the maturity mismatch in standard-length Eurodeposits
and credits
d. All of these

____ 13. Which of the following is an example of a Eurodollar?

a. A dollar deposit in an American bank.
b. A Yen deposit in a Japanese bank.
c. A dollar deposit in a French bank.
d. Euro deposited in European bank.
____ 14. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of 0.65 percent per
annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently
5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How
much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
a. $50,000
b. $100,000
c. $118,000
d. $120,000

____ 15. Japanese yen deposited in U.S. bank are called

a. Americoyen
b. Dollaroyen
c. Euroyen
d. Worldyen

____ 16. Find the VAR for a portfolio of $100M with daily standard deviation on return of 0.5% over 30-day
period. Note: z1% = 2.326
a. Below $5M
b. Between $5M and $10M
c. Between $10M and $20M
d. Above $20M

____ 17. Short-term notes underwritten by a group of international investment or commercial banks called a
"facility" are
a. eurocredits
b. eurocommercial papers
c. euro facilities
d. euronotes

____ 18. Short-term unsecured promissory notes issued by a corporation or a bank and placed directly with
the investment public through a dealer are called
a. eurocredits c. euro facilities
b. eurocommercial papers d. euronotes

____ 19. ABC Bank (seller) has made a "three against six" Forward Rate Agreement (FRA), with XYZ Bank
(buyer). The notional amount is $1,000,000, the settlement rate is 7%, the agreement rate is 6% and
the actual number of days in the three-month agreement period is 92. Which of the following
statements is true?
a. ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 92-day
FRA period
b. XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 92-day
FRA period
c. ABC Bank will pay XYZ Bank a cash settlement at the end of the 92-day FRA
period
d. XYZ Bank will pay ABC Bank a cash settlement at the end of the 92-day FRA
period
____ 20. The payment amount under this FRA is (consider 360 days a year):
a. $2,510
b. $2,526
c. $25,555
d. $25,555
MBA 7427 Sample Questions CH 6
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1
2. ANS: B PTS: 1
3. ANS: B PTS: 1
4. ANS: D PTS: 1
5. ANS: B PTS: 1
6. ANS: A PTS: 1
7. ANS: C PTS: 1
8. ANS: D PTS: 1
9. ANS: D PTS: 1
10. ANS: B PTS: 1
11. ANS: D PTS: 1
12. ANS: D PTS: 1
13. ANS: C PTS: 1
14. ANS: C PTS: 1
15. ANS: C PTS: 1
16. ANS: B PTS: 1
17. ANS: D PTS: 1
18. ANS: B PTS: 1
19. ANS: A PTS: 1
20. ANS: A PTS: 1
MBA 7427 Sample Questions CH 7

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. . A "foreign bond" issue is:

a. one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
b. one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
c. one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
d. one offered by a domestic borrower to investors in a national market and
denominated in that nation's currency
____ 2. A "Eurobond" issue is:
a. one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
b. usually a bearer bond.
c. for example a Dutch borrower issuing dollar-denominated bonds to investors in the
U.K., Switzerland, and the Netherlands.
d. All of these.

____ 3. In any given year, what percent of new international bonds are likely to be Eurobonds rather than
foreign bonds?
a. 80%
b. 45%
c. 25%
d. 15%

____ 4. A "bearer bond" is one:

a. that shows the owner's name on the bond.
b. that shows the owner's name on the bond.
c. in which mere possession is an evidence of the ownership.
d. in which possession only does not creates an evidence of the ownership.

____ 5. A "global bond" issue:

a. is a very large international bond offering by several borrowers pooled together
b. is a very large international bond offering by a single borrower that is
simultaneously sold in several national bond markets.
c. has higher yields for the purchasers.
d. has a lower liquidity.

____ 6. In which of the following currencies can Eurobond be denominated?

a. Euro only
b. Euro and BritiAny currencyAny currencysh Pounds only
c. Currency of any country located in Europe
d. Any currency
____ 7. Shelf registration allows an issuer to:
a. Shelf registration allows an issuer to:
b. shelve a securities issue and sell the securities later.
c. shelve a securities issue and sell the securities later.
d. preregister a securities issue and then shelve the securities for later purchase.

____ 8. Taxes on interest paid by nonresidents are called:

a. interest taxes.
b. non-resident taxes.
c. non-resident interest taxes
d. withholding taxes.

____ 9. Bonds with fixed coupon payments in regular intervals and a designated maturity date are called:
a. straight-fixed rate bonds.
b. euro-medium term bonds.
c. floating-rate bonds.
d. equity-related bonds.

____ 10. Which of the following is not an example of an equity-related bond:

a. Any convertible bond.
b. Any bond with equity warrant.
c. Any corporate stripped bond.
d. Bonds with equity warrants of state companies.

____ 11. Fixed-rate notes issued by a corporation with maturities ranging from less than 1 year to about 10
years in the international bond markets are called:
a. international straight-fixed rate notes
b. euro-medium term notes.
c. euro floating-rate bonds
d. international equity-related bonds.

____ 12. Consider a bond that was issued by a Canadian corporation in CA$, pays coupon payments in CA$,
but repays the face value in Euro. Such bond is called:
a. Global bond.
b. Dual-currency bond.
c. Eurodollar bond.
d. Foreign bond.

____ 13. Bonds with coupon payments indexed to some reference rates are called:
a. straight-fixed rate bonds.
b. euro-medium term notes.
c. floating-rate notes.
d. equity-related bonds.

____ 14. Convertible bonds are a type of:

a. straight-fixed rate bonds
b. euro-medium term notes
c. floating-rate notes.
 d. equity-related bonds

____ 15. Floating-rate notes (FRN):

a. experience very volatile price changes between reset dates.
b. are typically medium-term bonds with coupon payments indexed to some
reference rate (e.g. LIBOR).
c. do not appeal to investors with strong need to preserve the principal value of the
investment should they need to liquidate prior to the maturity of the bonds.
d. are typically long-term bonds with coupon payments indexed to some fixed rate

____ 16. A five-year Floating-rate note (FRN) has coupons referenced to six-month dollar LIBOR, and pays
coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk
premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on a
$1,000 face value FRN will be:
a. $29.375
b. $30.000
c. $30.625
d. $61.250

____ 17. "Investment grade" ratings are in the following categories:

a. Moody's: AAA to BBB - S&P's: Aaa to Baa
b. Moody's: Aaa to Baa - S&P's: AAA to BBB
c. Moody's: AAA to A - S&P's: Aaa to A
d. Moody's: Aaa to A - S&P's: AAA to A

____ 18. Zero-coupon bonds issued in 1999 are due in 2009. If they are sold at 55 percent of face value, the
implied yield to maturity is (round the final percentage answer to 2 decimal places):
a. 5.50%.
b. 5.50%.
c. 8.31%.
d. cannot be determined, need more information.

____ 19. The implicit SF/$ exchange rate at maturity of a Swiss franc/U.S. dollar dual currency bonds that
pay $581.40 at maturity per SF1,000, is (round the final percentage answer to 2 decimal places):
a. SF0.58/$1.00
b. SF1.58/$1.00.
c. SF1.72/$1.00
d. SF1.95/$1.00

____ 20. Zero-coupon bonds were issued in 2005. If they are sold at 55 percent of face value, and the implied
yield to maturity is 5%, the bonds will mature in:
a. 4.5 years.
b. 10.75 years.
c. 12.25 years.
d. cannot be determined, need more information.

____ 21. Zero-coupon bonds were issued in 2005. If their implied yield to maturity is 5%, and the bonds will
mature in 20 years, at what discount from the face value will they sell? (Do not round intermediate
answers and round the final percentage answer to 2 decimal places)
 a. 10%
b. 25.42%
c. 37.69%
d. cannot be determined, need more informatio
____ 22. A five-year $1,000 face value floating-rate note (FRN) has coupons referenced to six-month dollar
LIBOR, and pays coupon interest semiannually. Assume that the last six-month LIBOR was 6.5
percent and the current six-month LIBOR is 6 percent. If the risk premium above LIBOR that the
issuer must pay is 0.25%, by how much did the coupon payment change?
a. increase by $2.5
b. decrease by $2.5
c. increase by $5
d. decrease by $5

____ 23. Which statement is NOT true about market makers?

a. Market makers stand ready to buy or sell on their own account.
b. Market makers quote two-way bid and ask prices.
c. Market makers trade with one another only.
d. Market makers only make the bid-ask spread and charge no other commission.

____ 24. An underwriting syndicate consists of all of the following except:

a. lead manager
b. managing group
c. underwriting syndicate
d. managing syndicate
MBA 7427 Sample Questions CH 7
Answer Section

MULTIPLE CHOICE

1. ANS: B PTS: 1
2. ANS: D PTS: 1
3. ANS: A PTS: 1
4. ANS: C PTS: 1
5. ANS: B PTS: 1
6. ANS: D PTS: 1
7. ANS: C PTS: 1
8. ANS: D PTS: 1
9. ANS: A PTS: 1
10. ANS: C PTS: 1
11. ANS: B PTS: 1
12. ANS: B PTS: 1
13. ANS: C PTS: 1
14. ANS: D PTS: 1
15. ANS: B PTS: 1
16. ANS: C PTS: 1
17. ANS: B PTS: 1
18. ANS: B PTS: 1
19. ANS: C PTS: 1
20. ANS: C PTS: 1
21. ANS: C PTS: 1
22. ANS: B PTS: 1
23. ANS: B PTS: 1
24. ANS: D PTS: 1
MBA 7427 Sample Questions CH 8

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. A primary equity market is:

a. the equity market in home country of a corporation.
b. the equity market in which most of the company's shares are traded.
c. the process by which the firm issues its first publicly traded shares.
d. the U.S. equity market.

____ 2. A measure of "liquidity" for a stock market is:

a. the debt turnover ratio.
b. the ratio of stock market transactions, plus the size divided by a period of time.
c. the LIBOR rate.
d. the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market.
____ 3. A liquid stock market is one in which:
a. investors can buy and sell shares quickly at close to the current quoted prices.
b. investors can buy shares quickly at close to the current quoted prices.
c. investors can sell shares quickly at close to the current quoted prices,
d. investors can buy and sell shares quickly above the current quoted prices.

____ 4. A market in which investors can buy and sell shares quickly at the price close to the current quoted
price is called:
a. Efficient market.
b. Liquid market.
c. Regulated market.
d. Optimal market.

____ 5. Which of the following statements is true?

a. In the primary market, firms sell shares to investors and in the secondary market
investors sell shares to investors.
b. In the primary market, investors sell shares to investors and in the secondary
market firms sell shares to investors.
c. In the primary market, firms sell shares to investors for the first time and in the
secondary market firms sell shares to investors in subsequent equity issues.
d. In the primary market, investors sell shares to investors for the first time and in the
secondary market investors sell shares to investors after the initial sale.
____ 6. Cross-listing is a process when:
a. bonds and shares of the same company sold as a package.
b. shares of two or more companies are sold as a package.
c. shares of the same company are sold on different stock exchanges in different
countries.
d. shares of different companies are sold on different stock exchanges of a particular
country.
____ 7. Which ADRs are listed on a US exchange?
a. Level I only
b. Level I and II only
c. Level II and III only
d. Level III only

____ 8. A firm may cross-list its share to:

a. establish a broader investor base for its stock.
b. establish name recognition in foreign capital markets, thus paving the way for the
firm to source new equity and debt capital from investors in different markets.
c. expose the firm's name to a broader investor and consumer groups
d. All of these

____ 9. American Depository Receipt (ADRs) represents foreign stocks:

a. denominated in U.S. dollars that trade on European stock exchanges.
b. denominated in U.S. dollars that trade on a U.S. stock exchange or in the
over-the-counter market.
c. denominated in a foreign currency that trade on a U.S. stock exchange.
d. non-registered (bearer) securities.

____ 10. American Depository Receipts have all of the following characteristics except:
a. They are bearer shares.
b. They are quoted in US dollars.
c. Dividends on ADRs are paid in US dollars.
d. ADR trades clear in three business days.

____ 11. Canadian stocks are cross-listed in the United States as:
a. American depository receipts.
b. Global depository receipts.
c. Ordinary shares.
d. Global registered shares.

____ 12. Shares trade on foreign exchanges in all of the following forms except:
a. American depository receipts.
b. Global depository receipts.
c. American registered shares.
d. American registered shares.

____ 13. Factor that affects international equity returns is:

a. macroeconomic variables that influence the overall economy.
b. exchange rate changes.
c. exchange rate changes.
d. all of these.

____ 14. What/or who is Euronext N.V.?

a. President of the Eurobank
b. Vice-president of the Eurobank
c. Stock Exchange
 d. Stock Index

____ 15. All of the following are required criteria for a listing of a non-US company on the NYSE EXCEPT:
a. The number of publicly traded shares should be at least 2.5 million.
b. Global Market Capitalization is at least $500 million.
c. Annual revenue is at least $100 million.
d. pre-tax income is at least $50 million.

____ 16. "Call market" and "crowd trading" take place on:
a. a non-continuous exchange trading system.
b. a continuous trading exchange system.
c. non-continuous markets and continuous markets, respectively
d. continuous markets and not in non-continuous markets, respectively

____ 17. In the London market, Rolls Royce stock closed at £0.875 per share on Thursday, April 17, 2003.
Rolls Royce trades as an ADR in the OTC in the United States. Five underlying Rolls Royce shares
are packaged into one ADR. On April, 17, 2003, the British Pound sterling to the U.S. spot exchange
rate was £0.6366/$1.00. The no arbitrage U.S. price of one ADR is:
a. $4.87
b. $5.87
c. $6.87
d. $7.87

____ 18. If the Rolls Royce ADRs were trading at $5.75 when the underlying shares were trading in London
at £0.875, ignoring transaction costs, the arbitrage trading profit would be:
a. $0.00
b. $1.12
c. $2.12
d. $3.12

____ 19. Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share) are trading for
$40 on the New York Stock exchange. There is no arbitrage possible. What is the current SF/US$
exchange rate?
a. SF 0.8/$
b. SF 1/$
c. SF 1.25/$
d. SF 4/$

____ 20. Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share) are trading for
$40 on the New York Stock exchange. The current exchange rate is SF1/$ and a trader has $10,000
or the equivalent in SF. How can the trader make an arbitrage profit?
a. Buy ADRs in Zurich and sell shares in New York.
b. Buy ADRs in New York and sell shares in Zurich
c. Buy shares in Zurich and sell ADRs in New York.
d. Buy shares in New York and sell ADRs in Zurich.
____ 21. Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share) are trading for
$40 on the New York Stock exchange. The current exchange rate is SF1/$ and a trader has $10,000
or the equivalent in SF. How much arbitrage profit can the trader make?
a. $200
b. $1250
c. $2500
d. No profit can be made

____ 22. The major national stock market index for the Tokyo stock exchange is the
a. FTSE 100
b. DAX
c. Hang Seng
d. Nikkei 225
MBA 7427 Sample Questions CH 8
Answer Section

MULTIPLE CHOICE

1. ANS: C PTS: 1
2. ANS: D PTS: 1
3. ANS: A PTS: 1
4. ANS: B PTS: 1
5. ANS: A PTS: 1
6. ANS: C PTS: 1
7. ANS: C PTS: 1
8. ANS: D PTS: 1
9. ANS: B PTS: 1
10. ANS: A PTS: 1
11. ANS: C PTS: 1
12. ANS: C PTS: 1
13. ANS: D PTS: 1
14. ANS: C PTS: 1
15. ANS: D PTS: 1
16. ANS: A PTS: 1
17. ANS: C PTS: 1
18. ANS: B PTS: 1
19. ANS: C PTS: 1
20. ANS: B PTS: 1
21. ANS: C PTS: 1
22. ANS: D PTS: 1
MBA 7427 Sample Questions CH 12

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. It is conventional to classify foreign currency exposures into the following types:
a. economic exposure, transaction exposure, and translation exposure.
b. economic exposure, non-economic exposure, and political exposure.
c. national exposure, international exposure, and trade exposure.
d. conversion exposure, and exchange exposure.

____ 2. Economic exposure refers to

a. the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes.
b. the extent to which the value of the firm would be affected by unanticipated
changes in exchange rate.
c. the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates
d. ex post and ex ante currency exposures.

____ 3. Exposure to currency risk can be measured by the sensitivities of:

a. the future foreign currency values of the firm's assets and liabilities.
b. the firm's operating cash flows to specific changes in exchange rates.
c. the future home currency values of the firm's assets and liabilities.
d. None of these.

____ 4. The table below depicts the three possible values of future spot exchange rate and your foreign
assets. You used the simple regression model to estimate of the effect of the exchange rate on the
assets' value. Find the estimated slope of this regression b.
State Prob. P* S($/£) P(=SP*)
1 1/3 £1059 1.7 $1,800
2 1/3 £1,000 1.8 $1,800
3 1/3 £947 1.9 $1,800
a. -167
b. 0
c. 167
d. 250

____ 5. Operating exposure can be defined as:

a. the future home currency values of the firm's assets and liabilities.
b. the extent to which the firm's operating cash flows would be affected by random
changes in exchange rates.
c. the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes.
d. the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates.
____ 6. A firm's operating exposure is:
 a. defined as the extent to which the firm's operating cash flows would be affected by
the random changes in exchange rates.
b. determined by the structure of the markets in which the firm sources its inputs,
such as labor and materials, and sells its products.
c. determined by the firm's ability to mitigate the effect of exchange rate changes by
adjusting its markets, product mix, and sourcing.
d. all of these

____ 7. The variability of the dollar value of an asset (invested overseas) depends on:
a. the variability of the dollar value of the asset that is related to specific changes in
the exchange rate.
b. the dollar value variability that is dependent on the exchange rate movements.
c. the dollar value variability that is independent of exchange rate movements.
d. None of these.

____ 8. Operating exposure can be managed by:

a. flexible sourcing policy.
b. diversification of the market.
c. financial hedging.
d. all of these.

____ 9. The extent to which the value of the firm is affected by unanticipated changes in exchange rates is
called:
a. economic exposure.
b. operating exposure
c. translation exposure
d. translation exposure

____ 10. The exposure coefficient, b, is defined as:

a. Cov (P, S)/Cov (S).
b. Cov (P, S)/Var (S).
c. Var (S)/Cov (P,S).
d. Cov (P, S)/Var (P)

____ 11. The dollar operating cash flows following a depreciation of a foreign currency may change for the
following reasons:
a. the conversion effect.
b. the competitive effect.
c. the conversion effect and the conversion effect.
d. None of these.

____ 12. After the appreciation of the Canadian dollar, firm ABC loses market share in the United States
because American firms can sell their products at a lower price. This is an example of:
a. Competitive effect.
b. Conversion effect.
c. Exchange rate effect.
d. Exchange rate effect.

____ 13. Which of the following is not a strategy for managing operating exposure:
 a. Financial hedging.
b. Diversification of the market
c. Lowering sale prices.
d. Product differentiation
____ 14. Which of the following statements is true?
a. Exchange rate exposure on a foreign asset can be eliminated completely via
hedging in all cases.
b. Exchange rate exposure on a foreign asset can be eliminated completely via
hedging if the value of the foreign asset is fixed.
c. Exchange rate exposure on a foreign asset can be eliminated completely via
hedging if the value of the foreign asset is variable.
d. Exchange rate exposure on a foreign asset can never be eliminated completely.
MBA 7427 Sample Questions CH 12
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1
2. ANS: B PTS: 1
3. ANS: C PTS: 1
4. ANS: B PTS: 1
5. ANS: B PTS: 1
6. ANS: D PTS: 1
7. ANS: C PTS: 1
8. ANS: D PTS: 1
9. ANS: A PTS: 1
10. ANS: B PTS: 1
11. ANS: C PTS: 1
12. ANS: A PTS: 1
13. ANS: C PTS: 1
14. ANS: B PTS: 1
MBA 7427 Sample Questions CH 13

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Exchange rate exposure on a foreign asset can never be eliminated completely.
a. the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes,
b. the extent to which the value of the firm would be affected by unanticipated
changes in exchange rates,
c. the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates,
d. ex post and ex ante currency exposures,

____ 2. The most direct and popular way of hedging transaction exposure is by:
a. exchange-traded futures options.
b. currency forward contracts.
c. foreign currency warrants.
d. borrowing and lending in the domestic and foreign money markets.

____ 3. All of the following financial contracts may be used to hedge transaction exposure:
a. forward market hedge, money market hedge, option market hedge, swap market
hedge
b. forward market hedge, capital market hedge, option market hedge, swap market
hedge.
c. forward market hedge, money market hedge, option market hedge, interest rate
hedge.
d. forward market hedge, capital market hedge, option market hedge, interest rate
hedge.
____ 4. Encana Inc, a Canadian firm has a US dollar payable which it hedges using a forward market
contract. The Canadian dollar is quoted directly. Which of the following statements is true?
a. If the spot rate is greater than the forward rate at maturity, Encana is better off with
the hedge than without the hedge.
b. If the spot rate is less than the forward rate at maturity, Encana is better off with
the hedge than without the hedge.
c. If the spot rate is equal to the forward rate at maturity, Encana is better off with the
hedge than without the hedge.
d. Need more information.

____ 5. Encana Inc, a Canadian firm has a US dollar receivable which it hedges using a forward market
contract. The Canadian dollar is quoted directly. Which of the following statements is true?
a. If the spot rate is greater than the forward rate at maturity, Encana is better off with
the hedge than without the hedge.
b. If the spot rate is less than the forward rate at maturity, Encana is better off with
the hedge than without the hedge.
c. If the spot rate is equal to the forward rate at maturity, Encana is better off with the
 hedge than without the hedge.
d. . Need more information

____ 6. Buying a currency options provides

a. a flexible hedge against exchange exposure.
b. limits the downside risk while preserving the upside potential.
c. a right, but not an obligation, to buy or sell a currency.
d. all of these.

____ 7. The steps involved in a money market hedge for a foreign currency receivable of a Canadian firm
are in order:
a. Borrow Canadian dollars, buy foreign currency spot, invest in foreign currency
T-bills, pay foreign currency receivable
b. Borrow Canadian dollars, buy foreign currency spot, invest in Canadian T-bills,
collect foreign currency receivable
c. Borrow foreign currency, buy dollar spot, invest in foreign T-bills, collect foreign
currency receivable
d. Borrow foreign currency, buy dollar spot, invest in Canadian T-bills, collect
foreign currency receivable
____ 8. The steps involved in a money market hedge for a foreign currency payable of a Canadian firm are
in order:
a. Borrow Canadian dollars, buy foreign currency spot, invest in foreign currency
T-bills, pay foreign currency payable
b. Borrow Canadian dollars, buy foreign currency spot, invest in Canadian T-bills,
pay foreign currency payable
c. Borrow foreign currency, buy dollar spot, invest in foreign currency T-bills, collect
foreign currency proceeds
d. Borrow foreign currency, buy dollar spot, invest in Canadian T-bills, collect
foreign currency proceeds
____ 9. In evaluating the pros and cons of corporate risk management, "market imperfections" refer to:
a. information asymmetry, differential transaction costs, default costs, and
progressive corporate taxes.
b. leading and lagging, receivables and payables, and diversification costs.
c. economic costs, noneconomic costs, arbitrage costs, and hedging costs.
d. management costs, corporate costs, liquidity costs, and trading costs.

____ 10. ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has
progressive corporate taxes as shown below:
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
a. $3,375,000
b. $6,000,000
c. $1,500,000
d. $4,500,000
____ 11. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million
payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward
rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States.
XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium
of 0.012 cent per yen.

The future dollar cost of meeting this obligation using the money market hedge is: (Round your final
answer to nearest whole dollar and don't round intermediate calculations)
a. $6,450,000
b. $6,545,400
c. $6,653,833
d. $6,880,734

____ 12. The future dollar cost of meeting this obligation using the forward hedge is: (Round your final
answer to nearest whole dollar)
a. $6,450,000
b. $6,545,400
c. $6,653,833
d. $6,880,734

____ 13. Which of the following is not an operational hedge?

a. Invoice currency selection
b. Lead/lag strategy
c. Exposure netting
d. Money market hedge

____ 14. Which of the following is a financial hedge?

a. Invoice currency selection
b. Lead/lag strategy
c. Exposure netting
d. Money market hedge

____ 15. Which hedging technique is best to use to hedge contingent exposure?
a. Forward hedge
b. Money market hedge
c. Option hedge
d. Hedging with swaps

____ 16. You would like to use money market hedge to hedge your £21M A/R next year. Current spot rate is
1.7$/£, home (U.S.) risk-free interest rate is 10% and U.K. risk-free interest rate is 5%, What is your
next year dollar equivalent of these A/R if you have $25M debt at 12%:
a. $37.4M
b. $37.9M
c. $38.08M
d. None of the these.

____ 17. Which hedging technique is best to use to hedge recurrent exposure?
 a. Forward hedge
b. Money market hedge
c. Money market hedge
d. hedging with swaps

____ 18. ABC Corporation, located in Canada, has an accounts receivable of SF 1 million to be received in
one year. The current spot rate is $0.80/SF and the six-month forward rate is $0.82/SF. The one year
interest rates are 4.5 percent and 2 percent in Canada and Switzerland respectively. A one-year call
option on Swiss franc at the strike price of $0.81 per Swiss franc for a premium of 0.2 cent per Swiss
franc is available. The future dollar amount of this receivable using the money market hedge is:

a. $780,861.2
b. $784,313.7
c. $819,607.8
d. $1,220,096
____ 19. The future dollar amount of this receivable using the forward hedge is:
a. $800,000
b. $820,000
c. $836,400
d. $836,400

____ 20. Assume that the forward rate is the best predictor of the future spot rate. The expected future dollar
amount of this receivable using the option hedge is:
a. $799,100
b. $800,000
c. $810,100
d. $820,000
MBA 7427 Sample Questions CH 13
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1
2. ANS: B PTS: 1
3. ANS: A PTS: 1
4. ANS: A PTS: 1
5. ANS: B PTS: 1
6. ANS: D PTS: 1
7. ANS: D PTS: 1
8. ANS: A PTS: 1
9. ANS: A PTS: 1
10. ANS: A PTS: 1
11. ANS: C PTS: 1
12. ANS: D PTS: 1
13. ANS: D PTS: 1
14. ANS: D PTS: 1
15. ANS: C PTS: 1
16. ANS: A PTS: 1
17. ANS: D PTS: 1
18. ANS: C PTS: 1
19. ANS: B PTS: 1
20. ANS: A PTS: 1
MBA 7427 Sample Questions CH 14

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Translation exposure refers to:

a. accounting exposure.
b. the effect that an unanticipated change in exchange rates will have on the
consolidated financial reports of an MNC.
c. the change in the value of a foreign subsidiaries assets and liabilities denominated
in a foreign currency, as a result of exchange rate change fluctuations, when
viewed from the perspective of the parent firm.
d. All of these.

____ 2. Translation exposure is defined as:

a. the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes.
b. the extent to which the value of the firm would be affected by unanticipated
changes in exchange rate.
c. the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates.
d. ex post and ex ante currency exposures.

____ 3. Which translation method is used in Canada?

a. Current rate method only.
b. Temporal approach only.
c. Both current rate method and temporal approach..
d. None of these.

____ 4. The Canadian methods for consolidating the financial reports of an MNC are:
a. short/long term method and current/future method.
b. current/non-current method and short/long term method.
c. temporal method and current rate method.
d. temporal method and economic/non-economic method.

____ 5. Which of the following is true for the exchange rate used to translate long-term receivables?
a. Current exchange rate under both current rate method and temporal approach.
b. Current exchange rate under current rate method and historical rate under the
translation method.
c. Historical exchange rate under current rate method and current rate under the
translation method.
d. Historical exchange rate under both current rate method and temporal approach.

____ 6. Under the temporal approach, which exchange rate is used to translate most of the income statement
items?
a. Current exchange rate
b. Historical exchange rate
c. Average exchange rate for the period covered by the income statement.
 d. The firm has the right to choose any exchange rate that existed during the period
covered by the income statement
____ 7. Which of the following is a translation method where the gain or loss due to translation adjustment
does not affect reported cash flows?
a. Current/non-current method
b. Current rate method
c. Current/future method
d. Short/long term method

____ 8. The CICA handbook section 1650 contains recommendations on procedure and accounting policy in
regard to foreign operations of Canadian companies:

(i)- measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated
in a foreign currency according to generally accepted accounting principles

(ii)- uses the temporal method of translation

(iii)- provide information that is generally compatible with the expected economic effects of a rate
change on an enterprise's cash flows and equity

(iv)- uses the current rate method

Which of the above statements pertains to integrated foreign operations?

a. (i)
b. (i) and (ii)
c. (iii) and (iv)
d. (i), (ii), and (iii)

____ 9. Which of the above statements pertain to self-sustaining foreign operations?

a. (i)
b. (i) and (ii)
c. (iii) and (iv)
d. (i), (ii), and (iii)

____ 10. A foreign operation which is financially or operationally interdependent with the Canadian parent
company such that the exposure to exchange rate changes is similar to the exposure that would exist
had the transactions of the foreign operation been undertaken directly by the Canadian parent is
called a/an:
a. interdependent foreign operation.
b. integrated foreign operation.
 c. self-sustaining foreign operation
d. Has no special name.

____ 11. A foreign operation which is financially or operationally independent of the Canadian parent
company such that the exposure to exchange rate changes is limited to the Canadian company's net
investment in the foreign operation is called a/an:
a. interdependent foreign operation.
b. integrated foreign operation
c. independent foreign operation.
d. self-sustaining foreign operation.

____ 12. A "self-sustaining foreign operation" refers to:

a. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
b. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
c. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.
d. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.

____ 13. An "integrated foreign operation" refers to:

a. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
b. a foreign operation which is financially or operationally independent of the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation
c. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
limited to the Canadian company's net investment in the foreign operation.
d. a foreign operation which is financially or operationally interdependent with the
Canadian parent company such that the exposure to exchange rate changes is
similar to the exposure that would exist had the transactions of the foreign
operation been undertaken directly by the Canadian parent.
____ 14. The "functional currency" is:
a. the currency of the primary economic environment in which the entity operates.
b. the currency in which the MNC prepares its consolidated financial statements.
c. a currency that is not the parent firm's home country currency.
d. None of these.
____ 15. The "reporting currency" is:
a. the currency of the primary economic environment in which the entity operates.
b. the currency in which the MNC prepares its consolidated financial statements.
c. a currency that is not the parent firm's home country currency.
d. None of these.

____ 16. change in the ¥/$ exchange rate on the assets and liabilities of the consolidated balance sheet is:

Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a
"balance sheet hedge" of:
a. ¥200,000,000 less liabilities denominated in yen.
b. ¥200,000,000 more assets denominated in yen.
c. ¥200,000,000 of net exposure denominated in yen
d. None of these

____ 17. XYZ Corporation, a Canadian parent firm, has a wholly owned sales affiliate, ABC Ltd., in the
United Kingdom. The affiliate was established to service to the local market.
Assume that:

1. the functional currency of ABC is the pound

2. the reporting currency is the dollar
3. the initial exchange rate $1.00 = £ 0.67

ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that
ABC owes the parent firm £200,000. Assume that, XYZ had made an investment of $300,000 in the
affiliate. Under CICA 1650, the intercompany debt and investment will appear on the consolidated
balance sheet as:
a. £200,000.
b. $201,493.
c. $298,507
d. . None of these.

____ 18. Which of the following statements hold true in general?

a. Eliminating transaction exposure will also eliminate translation exposure
b. Eliminating transaction exposure will increase translation exposure.
c. Eliminating transaction exposure will reduce translation exposure.
d. None of these.

____ 19. Under the current rate method:

a. all balance sheet and all income statement items are translated at the current
exchange rate.
b. all balance sheet and some income statement items are translated at the current
exchange rate.
 c. some balance sheet and none of the income statement items are translated at the
current exchange rate.
d. some balance sheet and some income statement items are translated at the current
exchange rate.
____ 20. Under the temporal method:
a. all balance sheet and all income statement items are translated at the current
exchange rate.
b. all balance sheet and some income statement items are translated at the current
exchange rate.
c. some balance sheet and all income statement items are translated at the current
exchange rate.
d. some balance sheet and some income statement items are translated at the current
exchange rate.
____ 21. A Canadian firm has an integrated foreign operation in the United States. Which of the following
statements is true?
a. If the US dollar appreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be smaller.
b. If the US dollar depreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be larger.
c. If the US dollar depreciates, the Canadian dollar value reported in the balance
sheet of the assets in the United States will be smaller.
d. . Need more information

____ 22. The net effect of an increase in the exchange rate on translation exposure depends on:
a. the translation method used.
b. the translation method used.
c. whether the value of liabilities exceeds the value of assets.
d. All of these.

____ 23. Which of the following items will be translated at historical exchange rate under temporal method?
a. Monetary assets.
b. Nonmonetary assets.
c. All income statement items.
d. Both nonmonetary assets and all income statement items.
MBA 7427 Sample Questions CH 14
Answer Section

MULTIPLE CHOICE

1. ANS: D PTS: 1
2. ANS: C PTS: 1
3. ANS: C PTS: 1
4. ANS: C PTS: 1
5. ANS: A PTS: 1
6. ANS: C PTS: 1
7. ANS: B PTS: 1
8. ANS: B PTS: 1
9. ANS: C PTS: 1
10. ANS: B PTS: 1
11. ANS: D PTS: 1
12. ANS: A PTS: 1
13. ANS: D PTS: 1
14. ANS: A PTS: 1
15. ANS: B PTS: 1
16. ANS: C PTS: 1
17. ANS: D PTS: 1
18. ANS: D PTS: 1
19. ANS: C PTS: 1
20. ANS: D PTS: 1
21. ANS: C PTS: 1
22. ANS: D PTS: 1
23. ANS: B PTS: 1
MBA7427CH15

MULTIPLE CHOICE

1. Foreign direct investment is undertaken via:

a. buying bonds in a foreign company.
b. buying 1% of the equity capital of a foreign company
c. buying substantial degree of the equity capital of a foreign company.
d. can only be done when a foreign subsidiary is built up from scratch.
ANS: C PTS: 1

2. The key factors that are important in a firm's decision to invest overseas are:
a. Trade barriers, perfect labor market, and tangible assets.
b. product integration, product life cycle, and shareholder unification services.
c. profit maximization, global prestige, and competition.
d. Trade barriers, imperfect labor market, intangible assets, vertical integration,
product life cycle, and shareholder diversification.
ANS: D PTS: 1

3. Which of the following statements is true about product life cycle theory?
a. In the early stages of the product life cycle, the demand for the new product is
relatively insensitive to the price, and thus, a pioneering firm can charge a
relatively high price.
b. It predicts that over time, the U.S. switches from an exporting country of new
products to an importing country.
c. It has an "S" shaped curve when plotting "quantity sold" versus "time".
d. All of these.
ANS: D PTS: 1

4. The following are barriers to trade except

a. Tariffs
b. Transportation costs
c. Telecommunications
d. Import taxes
ANS: C PTS: 1

5. . Examples of intangible assets of MNCs are all except:

a. production costs.
b. R&D capabilities
c. marketing know-how
d. managerial know-how.
ANS: A PTS: 1

6. Cross-border acquisition involves:

a. building new production facilities in a foreign country.
b. buying existing foreign business.
 c. purchasing minor intangible assets in existing foreign business
d. None of these.
ANS: B PTS: 1

7. The most important mode of entering into a foreign market via FDI in the last few years is:
a. greenfield investments.
b. brownfield investments.
c. mergers & acquisitions.
d. All modes are equally important.
ANS: C PTS: 1

8. Greenfield investment:
a. is an investment in agricultural industry.
b. is an investment in a an environmentally friendly technology
c. can be a result of a cross-border acquisition of any existing and operational
business abroad.
d. None of these.
ANS: D PTS: 1

9. Synergistic gains refer to:

a. gains from hedging.
b. gains obtained when the value of the acquiring and target firms, combined
together, is greater than the stand-alone valuations of the individual firms.
c. gains arising if the companies can save on the costs of production, marketing,
distribution, and R&D standalone.
d. gains obtained when the companies face together into a competition for a
particular product market.
ANS: B PTS: 1

10. Political risk refers to:

a. the potential losses to the parent firm of an MNC resulting from adverse political
developments in the host country.
b. macro-economic risks.
c. micro-economic risks.
d. bankruptcy or high inflation rates.
ANS: A PTS: 1

11. Transfer risk refers to the risk which arises from the uncertainty about:
a. the host's country's policies affecting the local operations of an MNC.
b. the host's country's policy regarding ownership and control of local operations.
c. cross-border flows of capital, payment, know-how, and the like.
d. None of these.
ANS: C PTS: 1

12. Operational risk refers to the risk which arises from the uncertainty about:
a. the host's country's policies affecting the local operations of an MNC.
b. the host's country's policy regarding ownership and control of local operations.
 c. cross-border flows of capital, payment, know-how, and the like.
d. None of these.
ANS: A PTS: 1

13. Which of the following is an example of a transfer risk:

a. Risk of involuntary transfer of the firm's ownership from foreign shareholders to
the government of the host country through expropriation.
b. A possibility that the host country government will impose the restriction on the
percentage of the foreign ownership in which case new equity must be issued and
the current foreign shareholders will effectively lose control over the firm although
they will be compensated for their shares of control over the firm.
c. Risk that the firm's shares will not be allowed to be listed on the host country stock
exchange, which reduces the ability to freely transfer the ownership.
d. Restriction on the cross-border flow of capital.
ANS: D PTS: 1

14. Control risk refers to the risk which arises from the uncertainty about:
a. the host's country's policies affecting the local operations of an MNC.
b. the host's country's policy regarding ownership and control of local operations.
c. cross-border flows of capital, payment, know-how, and the like.
d. None of these.
ANS: B PTS: 1

15. Country risk refers to:

a. transfer risk
b. control risk
c. political risk, credit risk and other economic performances.
d. every risk except political risk.

ANS: C PTS: 1

16. Political risk can be evaluated by studying:

a. the host country's political and government system.
b. key economic indicators.
c. regional security.
d. All of these.

ANS: D PTS: 1

17. An increase in political risk can be managed by:

a. adjusting a foreign investment project's NPV by either reducing its expected cash
flows, or by increasing the cost of capital.
b. forming joint venture with a local company
c. purchasing insurance against the hazard of political risk.
d. All of these.

ANS: D PTS: 1

18. Which of the following is not an example of a political risk?

a. Expropriation.
 b. Change in tax law.
c. An unanticipated depreciation of the foreign currency.
d. All of the these are examples of political risk.
ANS: C PTS: 1

19. Some of the risks that a Canadian based MNC can encounter in its foreign investments are:
(i)- an increase in the cost of borrowing due to a rise in interest rates.
(ii)- increase in inflation rates.
(iii)- dumping.
(iv)- unfair competition by local companies.
(v)- inconvertibility of foreign currencies.
(vi)- expropriation.
(vii)- destruction of properties due to war, revolution, and other violent political events in
foreign countries.
(viii)- loss of business income due to political violence.
In Canada, the Export Development Canada (EDC) offers insurance against which of the
above:
a. (i), (ii), (iii), and (iv)
b. (v), (vi), (vii), and (viii)
c. .(iv), (v), (vi), and (vii)
d. none of these
ANS: B PTS: 1

20. Political risk is classified into

a. macro- and micro risk
b. major- and minor risk
c. macro- and minor risk
d. major- and micro risk

ANS: A PTS: 1
MBA7427CH20

MULTIPLE CHOICE

1. The three basic types of taxation are:

a. income tax, withholding tax, and value-added tax.
b. income tax, withholding tax, business tax
c. withholding tax, value-added tax, corporate tax.
d. personal tax, corporate tax, and operating tax.
ANS: A PTS: 1

2. If country A imposes tax on interest payment received by foreign residents, such tax is known
as:
a. direct tax.
b. foreign Income tax.
c. withholding tax.
d. capital export tax.
ANS: C PTS: 1

3. Which of the following is true for VAT (in Europe) and GST (in Canada)?
a. Both of them are applicable for export goods.
b. VAT is applicable for export goods while GST is not.
c. GST is applicable for export goods while VAT is not.
d. Neither of them are applicable for export goods.
ANS: D PTS: 1

4. A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the
countries that fall into this category are:
a. Bahamas, Bahrain, Bermuda, and the Cayman Islands.
b. Denmark, Norway, Switzerland, and Sweden.
c. Bulgaria, Canada, Saudi Arabia, and South Africa.
d. Congo, Egypt, Kuwait, and Zaire
ANS: A PTS: 1

5. The term "capital export neutrality" refers to:

a. the criterion that an ideal tax should be effective in raising revenue for the
government and not have any negative effects on the economic decision-making
process of the taxpayer.
b. the fact that taxable income is taxed in the same rate by the taxpayer's national tax
authority regardless of where in the world it is earned.
c. the criterion that the tax burden a host country imposes on the foreign subsidiary
of a MNC should be the same regardless in which country the MNC is
incorporated and the same as that placed on domestic firms.
d. underlying principle that all similarly situated taxpayers should participate in the
cost of operating the government according to the same rules.
ANS: B PTS: 1
 6. Value-added tax (VAT) is:
a. a direct national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production.
b. an direct national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production.
c. the equivalent of imposing international sales tax.
d. an indirect national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production.
ANS: D PTS: 1

7. The foreign tax credit method followed by the United States is

a. to grant the parent firm credit against its foreign tax liability for taxes paid to U.S.
tax authorities on foreign-source income.
b. for the purpose of avoiding taxation.
c. to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign
tax authorities on foreign-source income.
d. None of these.
ANS: C PTS: 1

8. A foreign branch is:

a. an extension of the parent and is not an independently incorporated firm separate
from the parent.
b. an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent of the
voting equity stock
c. either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
d. None of these.

ANS: A PTS: 1

9. A foreign subsidiary is:

a. an extension of the parent and is not an independently incorporated firm separate
from the parent
b. an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 51 percent of the
voting equity stock.
c. either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
d. None of these.

ANS: C PTS: 1

10. A controlled foreign corporation (CFC) is:

a. a foreign corporation established as an affiliate of a U.S. corporation for the
purpose of "buying" from the U.S. corporation property for resale and use abroad.
b. a foreign subsidiary that has more than 50 percent of its voting equity owned by
U.S. shareholders.
 c. is a separate domestic U.S. corporation actively engaged in business in a U.S.
possession (Puerto Rico and the U.S. Virgin Islands).
d. . one that has no "overall limitation" as regards to its foreign tax credits.
ANS: B PTS: 1

11. Two fundamental policy objectives in international taxation are:

a. tax neutrality and international treatment.
b. tax revenues and national treatment.
c. tax neutrality and national treatment.
d. tax revenues and international treatment.
ANS: C PTS: 1

12. A tax levied on passive income earned by an individual or a corporation of one country within
the tax jurisdiction of another is called
a. foreign income tax.
b. value-added tax.
c. investment tax
d. withholding tax.
ANS: D PTS: 1

13. A product sells in the first stage of production for EUR600, the second stage of production for
EUR 1,400 and the third stage of production for EUR 1,700. If the value-added tax (VAT)
rate is 15%, what would be the total VAT?
a. EUR 90
b. EUR120
c. EUR210
d. EUR255
ANS: D PTS: 1

14. To tax national residents of a country on their worldwide income is called:

a. worldwide or residential taxation.
b. worldwide or source taxation
c. territorial or residential taxation.
d. territorial or source taxation.
ANS: A PTS: 1

15. To tax all income earned within the country by any taxpayer is called
a. worldwide or residential taxation.
b. worldwide or source taxation.
c. territorial or residential taxation.
d. territorial or source taxation
ANS: D PTS: 1

16. In Canada:
a. Canadian-based MNC do not pay taxes on foreign-source income.
b. Canadian-based MNC pay taxes on foreign-source income but they are allowed to
claim foreign tax credits on the taxes paid abroad.
 c. .there is no federal corporate taxes.
d. there is no provincial corporate taxes.
ANS: A PTS: 1

17. Withholding tax is:

a. a tax levied on passive income earned by an individual or corporation of one
country within the jurisdiction of another country.
b. a direct tax on personal and corporate income.
c. an indirect national tax levied on the value added in the production of a good or
service
d. an indirect national tax levied on personal and corporate income.
ANS: A PTS: 1

18. Value-added tax is:

a. a tax levied on passive income earned by an individual or corporation of one
country within the jurisdiction of another country
b. a direct tax on personal and corporate income.
c. an indirect national tax levied on the value added in the production of a good or
service.
d. an indirect national tax levied on personal and corporate income.
ANS: C PTS: 1

19. Which of the following is true about the taxes paid by Canadian-based MNC to Canadian
government on the foreign-source income?
a. They are equal to the firm's ordinal income tax rate times the amount of
foreign-source income.
b. They are equal to half of the firm's ordinal income tax rate times the amount of
foreign-source income.
c. They are equal to the firm's ordinal income tax rate times the amount of
foreign-source income minus tax credits on taxes paid abroad.
d. They are equal to zero.
ANS: D PTS: 1
MBA 7427: Chapters 1-3 Sample questions and suggested answers from Chapters 1 2 and 3.

1. Why is it important to study international financial management? How is international financial

management different from domestic financial management?
Possible Answer: We live in a world where all the major economic functions, i.e., consumption, production,
and investment, are highly globalized. Above all, virtually all business is international business. For
example, firms export goods and services and, likewise, they import goods and services. Firms also invest
abroad, generating earnings in foreign places denominated in foreign currencies. It is thus essential for
managers to fully understand vital international dimensions of finance. The foreign dimensions of finance
are especially significant for Canadian business primarily because foreign markets are relatively more
important for Canadian firms than, for instance, is the case in the United States.
The major dimensions set international finance apart from domestic finance. They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.

2 . What are multinational corporations (MNCs), and what economic roles do they play?
Possible Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in
one country that has production and sales operations in other countries. Some MNCs have operations in
dozens of different countries. MNCs are the vehicle for foreign direct investment. MNCs are an important
means by which productive capital, technology and business skills are transferred from one country to
another around the globe. Global operations require MNC treasurers to establish international banking
relationships, to monitor and manage funds in several currency denominations and to effectively manage
foreign exchange risk.

3. Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the
gold standard. Discuss the advantages and disadvantages of the gold standard.

Possible Answer: The adjustment mechanism under the gold standard is referred to as the price-specie-
flow mechanism expounded by David Hume. Under the gold standard, a balance of payment disequilibrium
will be corrected by a counter-flow of gold. Suppose that the US imports more from the UK than it exports
to the latter. Under the classical gold standard, gold is the only means to settle international payments.
Since in our example the US owes money to the UK gold must flow from the U.S. to the UK As a result,
the US (UK) will experience a corresponding decrease (increase) in money supply. This means that the
price level will tend to fall in the US and rise in the UK Consequently, US products become more
competitive in the export market, while UK products become less competitive. This change will improve
US balance of payments and at the same time hurt the UK balance of payments, eventually eliminating the
initial BOP disequilibrium.
The advantages of the gold standard include: (i)) since the supply of gold is restricted, countries cannot
have high inflation; (ii) any BOP disequilibrium can be corrected automatically through cross-border flows
of gold. On the other hand, the main disadvantages of the gold standard are: (i) the world economy can be
subject to deflationary pressure due to restricted supply of gold; (ii) the gold standard itself has no
mechanism to enforce the rules of the game, and, as a result, countries may pursue economic policies (like
de-monetization of gold) that are incompatible with the gold standard.

4. There are arguments for and against the alternative exchange rate regimes.
a) List the advantages of flexible exchange rates.
b) Criticize flexible exchange rates from the viewpoint of the proponents of fixed exchange rates.
c) Rebut the above criticism from the viewpoint of the proponents of flexible exchange rates.
d) Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate.
Explain why this may be so.

Possible Answers

a) The advantages of the flexible exchange rate system include:

a. automatic achievement of balance of payments equilibrium
b. maintenance of national policy autonomy.
b) If exchange rates fluctuate randomly, that may discourage international trade and encourage market
segmentation. This, in turn, may lead to suboptimal allocation of resources.
c) Economic agents can hedge exchange risk by means of forward contracts and other techniques.
They don’t have to bear it if they choose not to. In addition, under a fixed exchange rate regime,
governments often restrict international trade in order to maintain the exchange rate. This is a self-
defeating measure. What’s good about the fixed exchange rate if international trade needs to be
restricted?
d) Once capital markets are integrated internationally, vast amounts of money may flow in and out of
a country in a short time period. Such volatile demands for the domestic currency (on Capital
Account) make it difficult for a country to maintain a fixed exchange rate.
5. Assess the possibility for the euro to become another global currency rivalling the US dollar. If
the euro really becomes a global currency, what impact will it have on the US dollar and the world
economy?
Possible Answer
In light of the large transactions domain of the euro, which is comparable to that of the U.S. dollar,
and the mandate for the European Central Bank (ECB) to guarantee the monetary stability in
Europe, the euro is likely to become a global currency over time. A major uncertainty about this
prospect is the lack of political integration of Europe. If Europe becomes politically more
integrated, the euro is more likely to become a global currency. If the euro becomes a global
currency, it will come at the expense of the dollar. Currently, the U.S. derives substantial benefit
from the dollar’s status as the dominant global currency. For instance, the U.S. can run trade deficits
without having to maintain substantial foreign exchange reserves and it can carry out international
commercial and financial transactions in dollars without bearing exchange risk. If the euro
becomes a major transactional, reserve and invoice currency in the world economy, dollar-based
agents will come to bear more exchange risk.
In this context, review the Maastricht Convergence Criteria.

6.
a. Comment on the following statement: “When Canada imports more than it exports, it is necessary
for Canada to import capital from foreign countries to finance its Current Account deficits.”
b. Explain how a country can run an overall balance-of-payments deficit or surplus.
c. Explain official reserve assets and its major components.

Possible Answers

a. The Balance of Payments must balance. A deficit on Current Account ( “When Canada
imports more than it exports ..”) means that Canada has spent more on imported goods and
services than it has received in sales of (Canadian exported) goods and services. The Current
Account deficit must be financed with an inflow of foreign capital involving the purchase of
Canadian securities by foreigners who have more Canadian dollars than they know what to do
with ( … “it is necessary for Canada to import capital from foreign countries to finance its
Current Account deficits.”) which, of course, is a surplus on Capital Account.
b. A country can run an overall BOP deficit or surplus by engaging in the official reserve
transactions. For example, Canada could run an overall BOP deficit by drawing down The
Bank of Canada’s reserve holdings. Likewise, an overall BOP surplus can be absorbed by
 adding to the central bank’s reserve holdings. The Bank of Canada generally does not
intervene – by using or accumulating foreign exchange reserves – to establish a specific value
for the Canadian dollar vis-à-vis, say, the US dollar. The Bank of Canada is committed to a
flexible exchange rate. As a result, the foreign exchange reserves of the Bank of Canada are
relatively small unlike, say, Asian countries that hold substantial reserves in order to protect
their currencies in the face of excess volatility.
c. Official reserve assets are those financial assets that can be used as international means of
payments. Currently, official reserve assets comprise: (i) gold, (ii) foreign exchanges, (iii)
special drawing rights (SDRs), and (iv) reserve positions with the IMF. Foreign exchanges are
by far the most important official reserves.