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Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

A) True
B) False

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If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

A) True
B) False

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Which of the following is NOT a reason why companies move into international operations?


A) To develop new markets for the firm's products.
B) To better serve their primary customers.
C) Because important raw materials are located abroad.
D) To increase their inventory levels.
E) To take advantage of lower production costs in regions where labor costs are relatively low.

F) B) and D)
G) B) and E)

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Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

A) True
B) False

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Exchange rate quotations consist solely of direct quotations.

A) True
B) False

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If it takes $0.71 U.S.dollars to purchase one Swiss franc, how many Swiss francs can one U.S.dollar buy?


A) 0.50
B) 0.71
C) 1.00
D) 1.41
E) 2.81

F) None of the above
G) B) and C)

Correct Answer

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If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

A) True
B) False

Correct Answer

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A U.S.-based company, Stewart, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus, Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Stewart end up paying on the loan?


A) 10.36%
B) 11.50%
C) 17.44%
D) 20.00%
E) 21.79%

F) C) and E)
G) None of the above

Correct Answer

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Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74, with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?


A) −7.92%
B) −4.13%
C) 6.00%
D) 8.25%
E) 12.00%

F) All of the above
G) D) and E)

Correct Answer

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