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Exam 17: Multinational financial management

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Question 1

True/False

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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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Question 2

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In 1985, a given Japanese imported automobile sold for 1, 476, 000 yen, or $8, 200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S.dollars?

A) $5.964
B) $8, 200
C) $10, 250
D) $12, 628
E) $13, 525

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

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Question 3

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The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

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

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Suppose it takes 1.82 U.S.dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days?

Suppose 1 U.S.dollar equals 1.60 Canadian dollars in the spot market.6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%) .6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds, what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

When the value of the U.S.dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S.corporations.

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39, 960 Swiss francs, or $24, 000, at the spot rate of 1.665 francs per dollar.The terms of the purchase are net 90 days, and the U.S.firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk.Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs.If the spot rate in 90 days is actually 1.638 francs, how much will the U.S.firm have saved or lost in U.S.dollars by hedging its exchange rate exposure?

The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.

Multinational financial management requires that financial analysts consider the effects of changing currency values.

A product sells for $750 in the United States.The exchange rate is $1 to 1.65 Swiss francs.If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S.dollar.