EXCERCISE _ INTERNATIONAL FINANCE

Chapter 2—International Flow of Funds

2. A high home inflation rate relative to other countries would ____ the home country's current account balance,
other things equal. A high growth in the home income level relative to other countries would ____ the home
country's current account balance, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase

3. If a country's government imposes a tariff on imported goods, that country's current account balance will likely
____ (assuming no retaliation by other governments).
a. Decrease
b. Increase
c. remain unaffected
d. either A or C are possible

5. An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.
a. Upward
b. Downward
c. No
d. upward or downward (depending on the size of the deficit)

6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance,
other things equal (assume that substitutes are readily available in the countries, and that the prices charged by
firms remain the same).
a. Increase
b. have no impact on
c. Reduce
d. all of the above are equally possible

10. Which of the following would likely have the least direct influence on a country's current account?
a. inflation.
b. national income.
c. exchange rates.
d. tariffs.
e. a tax on income earned from foreign stocks.

11. The "J curve" effect describes:

a. the continuous long-term inverse relationship between a country's current account balance
and the country's growth in gross national product.
b. the short-run tendency for a country's balance of trade to deteriorate even while its
currency is depreciating.
c. the tendency for exporters to initially reduce the price of goods when their own currency
 appreciates.
d. the reaction of a country's currency to initially depreciate after the country's inflation rate
declines.

12. An increase in the use of quotas is expected to:

a. reduce the country's current account balance, if other governments do not retaliate.
b. increase the country's current account balance, if other governments do not retaliate.
c. have no impact on the country's current account balance unless other governments
retaliate.
d. increase the volume of a country's trade with other countries.

26. ____ is (are) income received by investors on foreign investments in financial assets (securities).
a. Portfolio income
b. Direct foreign income
c. Unilateral transfers
d. Factor income

27. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:
a. it reduces the prices of imports paid by local companies.
b. it increases the prices of exports by local companies.
c. it prevents international trade transactions from being prearranged.
d. foreign companies may reduce the prices of their products to stay competitive.

54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan
appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.
a. True
b. False

67. Which of the following will probably not result in an increase in a country's current account balance (assuming
everything else constant)?
a. A decrease in the country's rate of inflation
b. A decrease in the country's national income level
c. An increase in government restrictions in the form of tariffs or quotas
d. An appreciation of the country's currency
e. All of the above will result in an increased current account balance.

70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance
of trade deficit with Country Y?
a. The government of Country X eliminates environmental restrictions.
b. The government of Country X subsidizes firms in its country to facilitate dumping.
 c. The government of Country X provides tax breaks to firms in specific industries.
d. The government of Country X removes a tariff on goods imported from Country Y.

71. Which of the following statements is not true?

a. Exporters commonly complain that they are being mistreated because the currency of their
country is too weak.
b. Outsourcing affects the balance of trade because it means that a service is purchased in
another country.
c. Sometimes, trade policies are used to punish countries for various actions.
d. Tariffs imposed by the EU have caused some friction between EU countries that
commonly import products and other EU countries.
e. All of the above are true.

Chapter 3—International Financial Markets

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread
is:
a. about 4.44%.
b. about 4.26%.
c. about 4.03%.
d. about 4.17%.

4. ____ is not a factor that affects the bid/ask spread.

a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread
 8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 Euros in
90 days, it could:
a. obtain a 90-day forward purchase contract on euros.
b. obtain a 90-day forward sale contract on euros.
c. purchase euros 90 days from now at the spot rate.
d. sell euros 90 days from now at the spot rate.

9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90
days to make payment on imports from Canada, it could:
a. obtain a 90-day forward purchase contract on Canadian dollars.
b. obtain a 90-day forward sale contract on Canadian dollars.
c. purchase Canadian dollars 90 days from now at the spot rate.
d. sell Canadian dollars 90 days from now at the spot rate.

10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the
Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars.
b. about .3977 Canadian dollars.
c. about 2.36 Canadian dollars.
d. about 2.51 Canadian dollars.

11. Which of the following is not true with respect to spot market liquidity?
a. The more willing buyers and sellers there are, the more liquid a market is.
b. The spot markets for heavily traded currencies such as the Japanese yen are very
liquid.
c. A currency's liquidity affects the ease with which an MNC can obtain or sell that
currency.
d. If a currency is illiquid, an MNC is typically able to quickly purchase that
currency at a reasonable exchange rate.

13. A forward contract can be used to lock in the ____ of a specified currency for a future point in time.
a. purchase price
b. sale price
c. A or B
d. none of the above

28. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot
rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it
would likely wish to hedge. It could hedge by ____ dollars forward.
 a. depreciate; buying
b. depreciate; selling
c. appreciate; selling
d. appreciate; buying

29. The bid-ask spread on an exchange rate can be used to directly determine:
a. how an exchange rate will change.
b. the transaction cost of foreign exchange.
c. the forward premium.
d. the currency option premium.

30. Futures contracts are typically ____; forward contracts are typically ____.
a. sold on an exchange; sold on an exchange
b. offered by commercial banks; sold on an exchange
c. sold on an exchange; offered by commercial banks
d. offered by commercial banks; offered by commercial banks

32. Which of the following is true?

a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in
the U.S.
b. U.S. firms may desire to issue bonds in the U.S. due to less regulations in the
U.S.
c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less
regulations in non-U.S. countries.
d. A and B

33. Eurobonds:
a. can be issued only by European firms.
b. can be sold only to European investors.
c. A and B
d. none of the above

34. Which currency is used the most to denominate Eurobonds?

a. the British pound.
b. the Japanese yen.
c. the U.S. dollar.
d. the Swiss franc.

38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in
Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?
 a. 73.75.
b. 125.
c. 1.69.
d. 0.014.
e. none of the above

39. The existence of imperfect markets has prevented the internationalization of financial markets.
a. True
b. False
 71. If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the
____ market to raise long-term funds.
a. Derivative
b. long-term credit
c. Money
d. foreign exchange

73. Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican
pesos, what is the amount of pesos that you need to purchase $100,000?
a. 12,600
b. 775,194
c. 793,651
d. 12,900

78. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
a. .01
b. 118
c. 1.18
d. .0087

81. Which of the following is not true about syndicated loans?

a. A borrower that receives a syndicated loan incurs various fees besides the
interest rate.
b. The loans are only denominated in U.S. dollars.
c. The loans are provided by a group of banks to a borrower.
d. The loans are usually formed in 6 weeks or less.

82. The interest rate on the syndicated loan depends on the:

a. currency denominating the loan.
b. maturity of the loan.
c. creditworthiness of the borrower.
d. interbank lending rate.
e. all of the above.

83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate,
but it still wants to hedge its risk. What type of hedging is more appropriate in this situation:
 a. Buy dollars forward
b. Sell dollars forward
c. Purchase call option
d. Purchase put option

87. The more intense the competition for the traded currency, the larger the bid/ask spread.
a. True
b. False

88. Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies.
a. True
b. False

89. At any given point in time, a bank's bid quote will be greater than its ask quote.
a. True
b. False

90. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate
fluctuations.
a. True
b. False

91. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific
price within a specific period of time.
a. True
b. False

92. The LIBOR varies among currencies because the market supply of and demand for funds vary among
currencies.
a. True
b. False

93. The international money market is frequently accessed by MNCs for short-term investment and financing
decisions, while longer term financing decisions are made in the international credit market or the
international bond market and in international stock markets.
a. True
b. False

95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your
position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate
is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the
5,000,000 yen 60 days from now if you sell yen forward?
a. $44,500
b. $45,000
 c. $526 million
d. $47,500
e. $556 million

96. Which of the following is probably not an example of the use of forward contracts by an MNC?
a. Hedging pound payables by selling pounds forward
b. Hedging peso receivables by selling pesos forward
c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward
e. All of the above are examples of using forward contracts.

97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a
quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____
quotation.
a. direct; indirect
b. indirect; direct
c. direct; direct
d. indirect; indirect
e. cannot be answered without more information

98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of
yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.
a. direct; 142.86
b. indirect; 142.86
c. indirect; 150
d. direct; 150
e. indirect; 0

100.Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British
pound payables?
a. Purchase pounds forward
b. Buy a pound futures contract
c. Buy a pound put option
d. Buy a pound call option

101. Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be
____ to satisfy an MNC's needs.
a. more standardized; standardized
 b. more standardized; custom-tailored
c. more custom-tailored; standardized
d. more custom-tailored; custom-tailored
e. less standardized; custom-tailored

102. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt
financing decisions are satisfied in the ____ market.
a. international money; international credit
b. international money; international bond
c. international credit; international money
d. international bond; international credit
e. international money; international stock

Chapter 4—Exchange Rate Determination

1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69.
The Australian dollar ____ by ____%.

a. depreciated; 5.80

b. depreciated; 4.00

c. appreciated; 5.80

d. appreciated; 4.00

4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally
expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S.
goods, and the Mexican peso should ____.

a. increase; appreciate

b. increase; depreciate

c. decrease; depreciate

d. decrease; appreciate

5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros
and ____ the supply of euros for sale.
a. reduce; increase

b. increase; reduce

c. reduce; reduce

d. increase; increase

10. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The
following annual interest rates apply:

Currency Lending Rate Borrowing Rate

Dollars 7.10% 7.50%

New Zealand dollar (NZ$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct,
what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its
existing consumer deposits to capitalize on its expectations)?

a. $521,325.

b. $500,520.

c. $104,262.

d. $413,419.

e. $208,044.

13. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and
British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates
stay the same. This would likely cause:

a. the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.

b. the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss
franc.

c. the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss
franc.

d. the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

15. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.

c. a decreased U.S. demand for euros and a decreased supply of euros for sale.

d. an increased U.S. demand for euros and a decreased supply of euros for sale.

19. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor
strikes by British suppliers. This action reflects:

a. an increased demand for British pounds.

b. a decrease in the demand for British pounds.

c. an increase in the supply of British pounds for sale.

d. a decrease in the supply of British pounds for sale.

30. Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on
goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and
the supply of Japanese yen to be exchanged for U.S. dollars to ____.

a. increase; increase

b. increase; decline

c. decline; decline

d. decline; increase

38. The main effect of interest rate movements on exchange rates is through their effect on international trade.

a. True

b. False

49. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of
euro today?

a. $1.365

b. $1.235

c. $1.330

d. $1.30

50. Government controls can only affect the supply of a given currency for sale and not the demand.
a. True

b. False

53. If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action,
then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.

a. appreciate; direct

b. depreciate; direct

c. appreciate; indirect

d. depreciate; indirect

67. If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would
consider intervening in the foreign exchange market by buying dollars with pounds.

a. True

b. False

68. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y
frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant,
an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange
rate of Country Y's currency.

a. True

b. False

74. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to
purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is
____ pressure on its currency's equilibrium value.

a. increase; decrease; downward

b. decrease; increase; upward

c. increase; decrease; upward

d. decrease; increase; downward

e. increase; increase; upward

Chapter 5—Currency Derivatives

1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically
invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near
future. Which of the following is not an appropriate hedging technique under these circumstances?

a. purchase Canadian dollars forward.

b. purchase Canadian dollar futures contracts.

c. purchase Canadian dollar put options.

d. purchase Canadian dollar call options.

2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000
in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June
1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of
the euro on September 1 is $1.15. Graylon will receive $____ for the euros.

a. 224,000

b. 220,000

c. 200,000

d. 230,000

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the
annualized forward premium or discount of the euro?

a. 1.9 percent discount.

b. 1.9 percent premium.

c. 7.6 percent premium.

d. 7.6 percent discount.

55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate
exhibits a ____ of ____.

a. premium; about 6%

b. discount; about 6%

c. discount; about 6.45%

d. premium; about 6.45%

56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this
currency exhibits a ____ of ____ on an annualized basis.

a. discount; 11.11%

b. premium; 11.11%

c. premium; 10.81%

d. discount; 10.81%

59. Which of the following is true regarding the options markets?

a. Hedgers and speculators both attempt to lower risk.

b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.

c. Hedgers and speculators are both necessary in order for the market to be liquid.

d. all of the above

60. The premium of a currency put option will increase if:

a. the volatility of the underlying asset goes up.

b. the time to maturity goes up.

c. the spot rate declines.

d. all of the above

61. Which of the following is true of options?

a. The writer decides whether the option will be exercised.

b. The writer pays the buyer the option premium.

c. The buyer decides if the option will be exercised.

d. More than one of these.

62. The purchase of a currency put option would be appropriate for which of the following?

a. Investors who expect to buy a foreign bond in one month.

b. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

c. Corporations who expect to collect on a foreign account receivable in one month.

d. all of the above

65. Which of the following is true for futures, but not for forwards?

a. actual delivery.

b. no transactions costs.

c. self regulation.

d. none of the above

66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your
position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is
$.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000
yen 60 days from now?

a. $44,500.

b. $45,000.

c. $526 million.

d. $47,500.

67. the spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an
annualized ____ of ____%.

a. discount; -4.07

b. premium; 4.07

c. discount; -4.08

d. premium; 4.08

e. premium; 3.40
70. If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures
and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the
forward rate.

a. True

b. False

71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually
liquidated by offsetting transactions.

a. True

b. False

72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures
contracts with the same maturity date.

a. True

b. False

75. Both call and put option premiums are affected by the level of the existing spot price relative to the strike
price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call
option but a relatively low premium for a put option.

a. True

b. False

81. If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the
forward rate and downward pressure on the futures rate.

a. True

b. False

82. Futures contracts are standardized with respect to delivery date and the futures price specified for the
settlement date.

a. True
b. False

83. If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell
an identical futures contract with the same settlement date.

a. True

b. False

102. If a currency put option is out of the money, then the present exchange rate is less than the strike price.

a. True

b. False

106. The annualized forward premium on the euro is 7%. What is the 90-day forward rate on the euro if the spot
rate today is $1.25?

a. $1.27

b. $1.34

c. $1.16

d. $1.23

107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted
at $.011. The forward ____ is ____ percent.

a. discount; 18.18

b. premium; 18.18

c. discount; 15.38

d. premium; 15.38

108. The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is
the 90-day forward rate of the pound?

a. $1.52

b. $1.61

c. $1.37

d. $1.46
109. The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the
30-day forward rate of the euro?

a. $1.28

b. $1.30

c. $1.42

d. $1.16

110. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the
buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller
of the put option are speculators.)

a. $1.30; $1.30

b. $1.34; $1.30

c. $1.30; $1.34

d. $1.34; $1.34

114. A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This
call option can be referred to as:

a. in the money.

b. out of the money.

c. at the money.

d. at a discount.

115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put
option can be referred to as:

a. in the money.

b. out of the money.

c. at the money.

d. at a discount.
116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British
pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of
the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The
premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no
transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive
under this strategy?

a. buy a put option and receive $150,000.

b. sell pounds forward and receive $155,000.

c. sell a call option and receive $156,000.

d. sell a put option and receive $157,000.

117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods
in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an
appropriate technique under these circumstances?

a. purchase euro put options.

b. sell euros forward.

c. sell euro futures contracts.

d. sell euro put options.

122. Which of the following does not represent the risk from using forward contracts?

a. if a forward contract is used to hedge receivables, and the spot exchange rate at the
expiration of contract exceeds the contract price.

b. if a forward contract is used to hedge receivables, and the spot exchange rate at the time of
expiration of contract is lower than the contract price.

c. if a forward contract is used to hedge payables, and the spot exchange rate at the time of
expiration of contract is lower than the contract price.

d. if a forward contract is used to hedge payables or receivables and the amount to be

received or paid is cancelled.

125. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To
do so, the MNC can either sell the foreign currency forward or sell futures.

a. True

b. False
126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

a. True

b. False

127. If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

a. True

b. False

153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a
currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate
and ____ pressure on the futures rate.

a. upward; downward

b. upward; upward

c. downward; upward

d. downward; downward

154. Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a
British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

a. 39,062.50

b. 100,000

c. 48,000

d. 87,062.50

155. Which of the following would result in a profit of a futures contract when the underlying currency
depreciates?

a. Buy a futures contract; sell a futures contract after the currency has depreciated

b. Sell a futures contract; buy a futures contract after the currency has depreciated

c. Buy a futures contract; buy an additional futures contract after the currency has
depreciated
d. None of the above would result in a profit when the underlying currency of the futures
contract depreciates.

156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a
foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting
a currency to appreciate would ____ futures.

a. buy; buy

b. sell; sell

c. buy; sell

d. sell; buy

159. When a currency call option is classified as "in the money," this indicates that

a. the spot rate of the currency is less than the exercise price of the option.

b. the spot rate of the currency is greater than the exercise price of the option.

c. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum
of the exercise price and the premium paid.

d. the buyer of the option would generate a profit; that is, the exercise price would exceed the
sum of the spot rate and the premium paid.

160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium
is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the
total amount paid by the corporation if it acts rationally?

a. $33,600

b. $46,900

c. $44,100

d. $36,400

161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of
$0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a
premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium
of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit?

a. $0.03
b. $0.05

c. $0.01

d. $0.04

Chapter 6—Government Influence on Exchange Rates

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

a. sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.

b. sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.

c. sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should not intervene.

d. sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell pounds for dollars in the foreign exchange market.

2. A weak dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

3. A strong dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the
dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major
foreign countries.

a. weakening; increase

b. weakening; decrease

c. strengthening; increase

d. strengthening; decrease

19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest
rates, which places ____ pressure on U.S. bond prices.

a. upward; downward; upward

b. upward; downward; downward

c. upward; upward; downward

d. downward; upward; upward

e. downward; downward; upward

26. Which of the following is true regarding the euro?

a. Exchange rate risk between participating European currencies is completely eliminated,

encouraging more trade and capital flows across European borders.

b. It allows for more consistent economic conditions across countries.

c. It prevents each country from conducting its own monetary policy.

d. All of the above are true.

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would
like to reduce unemployment. Which of the following is an appropriate action given this scenario?

a. Weaken the dollar

b. Strengthen the dollar

c. Buy dollars with foreign currency in the foreign exchange market

d. Implement a tight monetary policy

29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____
Treasury securities.

a. buy; sell
b. sell; buy

c. buy; buy

d. sell; sell

30. As foreign exchange activity has grown, a given degree of central bank intervention has become:

a. more effective.

b. more frequent.

c. less effective.

d. none of the above

31.When using indirect intervention, a central bank is likely to focus on:

a. inflation.

b. interest rates.

c. income levels.

d. expectations of future exchange rates.

54. The Fed's indirect method of intervention is to trade dollars for or against other currencies.

a. True

b. False

55.China is commonly criticized for keeping the yuan's value at superficially high levels.

a. True

b. False

60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest
rates to increase the value of the yen vs. the dollar.

a. True

b. False
62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more
insulated from unemployment problems in other countries.

a. True

b. False

64. A country with a currency board does not have control over its local interest rates.

a. True

b. False

77. A "dirty" float represents a system of:

a. freely floating exchange rates.

b. fixed exchange rates.

c. floating exchange rates, but the central bank can manipulate the currency.

d. fixed exchange rates, but the central bank can manipulate the currency.

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

a. True

b. False

87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

a. exchange dollars for foreign currencies, and sell some of its existing Treasury security
holdings for dollars.

b. exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars.

c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.

d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will
cause an ____ U.S. dollars and an ____ euros.

a. inward shift in demand for; outward shift in supply of

b. inward shift in demand for; inward shift in supply of

c. outward shift in supply of; outward shift in demand for

d. outward shift in supply of; inward shift in demand for

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most
likely ____ to capitalize on this intervention.

a. purchase yen put options

b. sell yen futures contracts

c. purchase yen call options

d. buy U.S. Treasury bonds

115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to
counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed
would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.

b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.

c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.

d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.

e. none of the above

Chapter 7—International Arbitrage and Interest Rate Parity

1. Due to ____, market forces should realign the relationship between the interest rate differential of two
currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.

a. forward realignment arbitrage

b. triangular arbitrage

c. covered interest arbitrage

d. locational arbitrage

2. Due to ____, market forces should realign the spot rate of a currency among banks.

a. forward realignment arbitrage

b. triangular arbitrage
c. covered interest arbitrage

d. locational arbitrage

3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the
spot exchange rates of the two currencies against the U.S. dollar.

a. forward realignment arbitrage

b. triangular arbitrage

c. covered interest arbitrage

d. locational arbitrage

4. If interest rate parity exists, then ____ is not feasible.

a. forward realignment arbitrage

b. triangular arbitrage

c. covered interest arbitrage

d. locational arbitrage

6. When using ____, funds are not tied up for any length of time.

a. covered interest arbitrage

b. locational arbitrage

c. triangular arbitrage

d. B and C

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S.
interest rate. According to interest rate parity, the forward rate of Currency X:

a. should exhibit a discount.

b. should exhibit a premium.

c. should be zero (i.e., it should equal its spot rate).

d. B or C

9. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound
(in U.S. dollars) is the same as the pound's spot rate, then:

a. U.S. investors could possibly benefit from covered interest arbitrage.

b. British investors could possibly benefit from covered interest arbitrage.

c. neither U.S. nor British investors could benefit from covered interest arbitrage.

d. A and B

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate.
Which of the following forces results from the act of this covered interest arbitrage?

a. upward pressure on the Swiss franc's spot rate.

b. upward pressure on the U.S. interest rate.

c. downward pressure on the Swiss interest rate.

d. upward pressure on the Swiss franc's forward rate.

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%.
The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use
covered interest arbitrage, what forces should occur?

a. spot rate of peso increases; forward rate of peso decreases.

b. spot rate of peso decreases; forward rate of peso increases.

c. spot rate of peso decreases; forward rate of peso decreases.

d. spot rate of peso increases; forward rate of peso increases.

14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid
rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would
be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over
and above the $1,000,000 you started with?

a. $15,385.

b. $15,625.

c. $22,136.

d. $31,250.

16. Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound = $1.30

90-day forward rate of pound = $1.28

3-month deposit rate in U.S. = 3%

3-month deposit rate in Great Britain = 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will
have after 90 days?

a. $1,024,000.

b. $1,030,000.

c. $1,040,000.

d. $1,034,000.

e. none of the above

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists,
then:

a. British investors who invest in the United Kingdom will achieve the same return as U.S.
investors who invest in the U.S.

b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than
what they would earn in the U.S.

c. U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the
U.S.

d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the
U.S.

20. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid Ask

Bank A $1.41 $1.42

Bank B $1.39 $1.40

As locational arbitrage occurs:

a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will
increase.

b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will
decrease.

c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will
decrease.

d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will
increase.

26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the
Canadian dollar in pounds?

a. 2.0.

b. 2.40.

c. .80.

d. .50.

e. none of the above

30. Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%.
Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the
increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

a. discount; increase

b. discount; decrease

c. premium; increase

d. premium; decrease

41. National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price Quoted Ask Price

Value of a British pound (£) in $ $1.61 $1.62

Value of a New Zealand dollar (NZ$) in $ $.55 $.56

Value of a British pound in

New Zealand dollars NZ$2.95 NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

a. $77.64.

b. $197.53.

c. $15.43.

d. $111.80.

68. Assume the following information:

Exchange rate of Japanese yen in U.S. $ = $.011

Exchange rate of euro in U.S. $ = $1.40

Exchange rate of euro in Japanese yen = 140 yen

What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

a. $100,000

b. -$90,909

c. 10%

d. -9.09%

Chapter 8—Inflation, Interest Rates, and Exchange Rates

1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing
power parity (PPP) as related to these two countries?
a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will
weaken.

b. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will
weaken.

c. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will
strengthen.

d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will
weaken.

2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

a. a home currency will depreciate if the current home inflation rate exceeds the current
foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate.

3. The international Fisher effect (IFE) suggests that:

a. a home currency will depreciate if the current home interest rate exceeds the current
foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate.

4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:

a. reduce the probability that PPP shall hold.

b. increase the probability that PPP shall hold.

c. increase the probability the IFE will hold.

d. B and C

6. According to the IFE, if British interest rates exceed U.S. interest rates:

a. the British pound's value will remain constant.

b. the British pound will depreciate against the dollar.

c. the British inflation rate will decrease.

d. the forward rate of the British pound will contain a premium.

e. today's forward rate of the British pound will equal today's spot rate.

10. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:

a. some corporations with excess cash can lock in a guaranteed higher return on future
foreign short-term investments.

b. some corporations with excess cash could have generated profits on average from covered
interest arbitrage.

c. some corporations with excess cash could have generated higher profits on average from
foreign short-term investments than from domestic short-term investments.

d. most corporations that consistently invest in foreign short-term investments would have
generated the same profits (on average) as from domestic short-term investments.

12. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one
year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on
investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

a. 2%.

b. 3%.

c. -2%.

d. 5%.

e. 8%.

14. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%,
and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about
____ the U.S. inflation rate, and the British pound is expected to ____.

a. 2 percentage points above; depreciate by about 2%

b. 3 percentage points above; depreciate by about 3%

c. 3 percentage points below; appreciate by about 3%

d. 3 percentage points below; depreciate by about 3%

e. 2 percentage points below; appreciate by about 2%

21. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP,
the Singapore dollar should ____ by ____%.

a. appreciate; 4.85

b. depreciate; 3,11

c. appreciate; 3.11

d. depreciate; 4.85

22. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the
Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested
by purchasing power parity, the new exchange rate for the yen will be:

a. $0.0076.
b. $0.0073.

c. $0.0070.

d. $0.0066.

23. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S.
consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the
U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

a. reduce; increase; appreciation

b. increase; reduce; appreciation

c. reduce; increase; depreciation

d. reduce; increase; appreciation

46. Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have
$100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate
is $1.40. What will be the yield on your investment if you invest in euros?

a. 8%

b. 5%

c. 3%

d. 2.78%

47. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%.
The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000
to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689.
What will be the yield on your investment if you invest in the Australian market?

a. 6%

b. 3%

c. 4%

d. 2%

Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1.Translation exposure reflects:
a. the exposure of a firm's international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm's local currency value to transactions between foreign exchange traders.
c. the exposure of a firm's financial statements to exchange rate fluctuations.
d. the exposure of a firm's cash flows to exchange rate fluctuations.

3. Economic exposure refers to:

a. the exposure of a firm's international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm's local currency value to transactions between foreign exchange traders.
c. the exposure of a firm's financial statements to exchange rate fluctuations.
d. the exposure of a firm's cash flows to exchange rate fluctuations.
e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two
currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has
the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows.
Which firm has a higher exposure to exchange rate risk?
a. Diz Co.
b. Yanta Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These
two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based
MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash
outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co.
b. Kriner Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

8. Which of the following operations benefit(s) from depreciation of the firm's local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
b. purchasing foreign supplies.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local
currency.
d. A and B

12. A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated
currencies. During ____ dollar cycles, cash outflows are ____.
a. weak; somewhat stable
b. weak; favorably affected
c. weak; adversely affected
d. none of the above

13. Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net
inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40
while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are
highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.
14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign
currency.
a. favorably; stronger
b. not; stronger
c. favorably; weaker
d. not; weaker
e. B and D

18. If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a
____ overall impact of the Swiss franc's depreciation against the dollar on ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses

19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly
U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price
(SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt is the dependent variable.
You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you
increased your importing volume. You should expect that the regression coefficient in the PESOt variable would
be ____ in the first subperiod and ____ in the second subperiod.
a. negative; positive
b. positive; positive
c. positive; negative
d. negative; negative

22. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B
has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is
$.55. What is the net inflow or outflow as measured in U.S. dollars?
a. $500,000 outflow.
b. $500,000 inflow.
c. $275,000 inflow.
d. $275,000 outflow.

26. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____
correlated, the MNC's transaction exposure is relatively ____.
a. negatively; high
b. negatively; low
c. positively; low
d. none of the above

Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra
estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days.
Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a
95% confidence level for the following question(s).
29. Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected percentage change of the
euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is
$1.01.
a. -$75,750.
b. -$60,600.
c. -$111,100.
d. -$25,250.

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and
Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is
estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months,
Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent
for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.\
31. Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%.
b. 5.44%.
c. 17.98%.
d. none of the above

32. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the
next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level
and assume the monthly percentage changes for each currency are normally distributed.
a. -9.00%.
b. -30.00%.
c. -5.00%.
d. none of the above

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan.
Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.
66. enco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to
change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ____ and
if the Japanese yen depreciates, its imports from Japan will probably ____.
a. increase; decrease
b. decrease; increase
c. increase; stay the same
d. stay the same; stay the same

67. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows
of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012
while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen
and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then
Yomance Co. will:
a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
c. be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen
position.
d. be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound
position.

Chapter 11—Managing Transaction Exposure

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90
days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a
discount.
d. zero.
3. Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = $.40
Swiss franc spot rate = $.39
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000
in 1 year.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given
that the firm executes a forward hedge?
a. $234,000.
b. $238,584.
c. $240,000.
d. $236,127.
4. Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive
NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given
that the firm executes a money market hedge?
a. $238,584.
b. $240,000.
c. $234,000.
d. $236,127.
6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
d. A and B

7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. sell a currency call option in British pounds.
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B
14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate
substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.
18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S. Switzerland
360-day borrowing rate 7% 5%
 360-day deposit rate 6% 4%

Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Company
uses a money market hedge, it will receive ____ in 360 days.
a. $101,904
b. $101,923
c. $98,769
d. $96,914
e. $92,307
25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the
NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a
premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a
premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution
for the spot rate in 180 days:
Possible Spot Rate
in 90 Days Probability
$.48 10%
$.49 60%
$.55 30%
*The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____
(deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above
27. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next
month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is
$.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the
end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the
revenue from hedging minus the revenue from not hedging receivables is____.
a. $0.
b. -$7,500.
c. $7,500.
d. none of the above
57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC
would buy futures.
a. True
b. False
64. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time
that the options are purchased.
a. True
b. False
67. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge
is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False
68. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days
from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a
discount.
d. zero.
70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate
substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged
71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an
exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of
$.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position.
Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after
considering the premium paid)?
a. $330,000
b. $325,000
c. $320,000
d. $340,000
84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False
87.Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to
depreciate.
a. True b. False
Chapter 12—Managing Economic Exposure and Translation Exposure
1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm's reported
earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it
could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
a. be reduced; purchasing
b. be reduced; selling
c. increase; selling
d. increase; purchasing
2. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue.
All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger
dollar and would ____ a weaker dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. be unaffected by; benefit from
e. benefit from; benefit from
4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98
million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its
Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase
dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore's exposure to changes in the
peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform
better when the peso is valued ____ relative to the dollar.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high
5. Which of the following is an example of economic exposure but not an example of transaction exposure?
a. An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign
competitors are able to increase their sales to U.S. customers.
b. An increase in the pound's value increases the U.S. firm's cost of British pound payables.
c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
d. A decrease in the Swiss franc's value decreases the dollar value of interest payments on a
Swiss deposit sent to a U.S. firm by a Swiss bank.
7. If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if
the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens
11. With regard to hedging translation exposure, translation losses ____, and gains on forward contracts used to
hedge translation exposure ____.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed
12. If a firm does not have foreign subsidiaries, it is not subject to ____.
a. transaction exposure
b. economic exposure
c. A and B
d. translation exposure
24. Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied
regression analysis to determine whether the percentage change in its total cash flow is related to the percentage
change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that
the cash flows are ____ related to the percentage changes in the euro.
a. positive; positively
b. positive; negatively
c. negative; positively
d. B and C
e. none of the above
26. An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the
foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the
loan payment, while the MNC's foreign currency revenues will convert to ____ dollars.
a. more; fewer
b. more; more
c. less; fewer
d. less; more