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290+ International Financial Management Solved MCQs

These multiple-choice questions (MCQs) are designed to enhance your knowledge and understanding in the following areas: Master of Business Administration (MBA) .

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Chapter: Unit 2
101.

The biggest disadvantage of a fixed exchange rate is the

A. increased probability of high inflation.
B. tradeoff between supporting the exchange rate and adjusting the trade balance.
C. tradeoff between supporting the exchange rate and maintaining full employment.
D. increased probability of a trade deficit.
Answer» A. increased probability of high inflation.
discuss
102.

The effect of a depreciation of the domestic currency on the trade balance is likely to

A. increase it in the short and long runs.
B. decrease it in the short run and increase it in the long run.
C. decrease it in the short and long runs.
D. increase it in the short run and decrease it in the long run.
Answer» B. decrease it in the short run and increase it in the long run.
discuss
103.

Which of the following institutions is the most important participant in foreign currency markets?

A. A retail customer
B. A commercial bank
C. A foreign exchange broker
D. A central bank
Answer» D. A central bank
discuss
104.

An increase in the U.S. demand for the euro

A. causes a rise in the dollar exchange rate.
B. causes the euro to appreciate.
C. causes the dollar to depreciate.
D. causes Euro Area goods to be relatively more expensive.
Answer» A. causes a rise in the dollar exchange rate.
discuss
105.

Which of the following would NOT be a cause for an increased American demand for the euros?

A. The United States having lower interest rates than the Euro Area
B. Increased American demand for Euro Area goods
C. The expectation by speculators that the value of the euro is edging up
D. More economic expansion in the United States
Answer» B. Increased American demand for Euro Area goods
discuss
106.

Which of the following is NOT one of the determinants of the gains of adopting a single currency?

A. A well-synchronized business cycle involving all member countries
B. The possibility of factors of production to freely move across borders
C. The willingness and ability of member countries to design policies to address regional imbalances that may develop
D. Widening the common market by allowing other countries to join
Answer» A. A well-synchronized business cycle involving all member countries
discuss
107.

If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.

A. True
B. False
C. all
D. none
Answer» A. True
discuss
108.

Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

A. fundamental forecasting.
B. technical forecasting.
C. market-based forecasting.
D. mixed forecasting.
Answer» B. technical forecasting.
discuss
109.

If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:

A. underestimated the future exchange rates over time.
B. overestimated the future exchange rates over time.
C. forecasted future exchange rates accurately.
D. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
Answer» B. overestimated the future exchange rates over time.
discuss
110.

Which of the following is true according to the text?

A. Forecasts in recent years have been very accurate.
B. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
C. Forecasting errors are smaller when focused on longer term periods.
D. None of the above.
Answer» D. None of the above.
discuss
111.

Which of the following is not a forecasting technique mentioned in your text?

A. accounting-based forecasting.
B. fundamental forecasting.
C. technical forecasting.
D. market-based forecasting.
Answer» A. accounting-based forecasting.
discuss
112.

Which of the following is not a method of forecasting exchange rate volatility?

A. using the absolute forecast error as a percentage of the realized value.
B. using the volatility of historical exchange rate movements as a forecast for the future.
C. using a time series of volatility patterns in previous periods.
D. deriving the exchange rate's implied standard deviation from the currency option pricing model.
Answer» A. using the absolute forecast error as a percentage of the realized value.
discuss
113.

Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:

A. about .3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about .3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer» C. about .3137 Canadian dollars.
discuss
114.

When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:

A. closing prices in the U.S. during the previous day.
B. closing prices in Canada during the previous day.
C. prevailing prices in locations where the foreign exchange markets have been open.
D. officially set by central banks before the U.S. market opens.
Answer» C. prevailing prices in locations where the foreign exchange markets have been open.
discuss
115.

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer» D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
discuss
116.

If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:

A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer» A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
discuss
117.

If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with

A. international monetary credits.
B. dollars.
C. yuan, the Chinese currency.
D. euros, or any other third currency.
Answer» C. yuan, the Chinese currency.
discuss
118.

In the foreign exchange market, the ________ of one country is traded for the ________ of another country.

A. currency; currency
B. currency; financial instruments
C. currency; goods
D. goods; goods
Answer» A. currency; currency
discuss
119.

Which of the following examples definitely illustrates a depreciation of the U.S. dollar?

A. The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
B. The dollar exchanges for 250 yen and then exchanges for 275 francs.
C. The dollar exchanges for 100 francs and then exchanges for 120 yen.
D. The dollar exchanges for 120 francs and then exchanges for 100 francs
Answer» D. The dollar exchanges for 120 francs and then exchanges for 100 francs
discuss
120.

By definition, currency appreciation occurs when

A. the value of all currencies fall relative to gold.
B. the value of all currencies rise relative to gold.
C. the value of one currency rises relative to another currency.
D. the value of one currency falls relative to another currency.
Answer» C. the value of one currency rises relative to another currency.
discuss
121.

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.
Answer» D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.
discuss
122.

Under a fixed exchange rate system:

A. central bank intervention in the foreign exchange market is often necessary;
B. central bank intervention in the foreign exchange market is not necessary since rates do not move;
C. central bank intervention in the foreign exchange market is not permitt
Answer» A. central bank intervention in the foreign exchange market is often necessary;
discuss
123.

Given a home country and a foreign country, purchasing power parity suggests that:

A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate;
B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
C. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate;
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate;
Answer» B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
discuss
124.

If purchasing power parity were to hold even in the short run, then:

A. quoted nominal exchange rates should be stable over time.
B. real exchange rates should tend to increase over time;
C. real exchange rates should tend to decrease over time;
D. real exchange rates should be stable over time;
Answer» D. real exchange rates should be stable over time;
discuss
125.

The international Fisher effect suggests that should pound interest rates exceed US dollar interest rates:

A. the pound’s value will remain constant;
B. the pound will be at a discount on the dollar;
C. UK inflation rate will decrease.
D. the pound will depreciate against the dollar;
Answer» D. the pound will depreciate against the dollar;
discuss
Chapter: Unit 3
126.

Kalons ltd. is a UK-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.
Answer» C. purchase Canadian dollar put options.
discuss
127.

Which of the following is the most likely strategy for a UK firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

A. purchase a call option on francs.
B. sell a futures contract on francs.
C. obtain a forward contract to purchase francs forwa
Answer» B. sell a futures contract on francs.
discuss
128.

Which of the following is true?

A. Most forward contracts between firms and banks are for speculative purposes.
B. Most future contracts represent a conservative approach by firms to hedge foreign trade.
C. The forward contracts offered by banks have maturities for only four possible dates in the future.
D. none of the above
Answer» D. none of the above
discuss
129.

European currency options can be exercised _______; American currency options can be exercised _______.

A. any time up to the expiration date; any time up to the expiration date
B. any time up to the expiration date; only on the expiration date
C. only on the expiration date; only on the expiration date
D. only on the expiration date; any time up to the expiration date
Answer» D. only on the expiration date; any time up to the expiration date
discuss
130.

A UK corporation has purchased currency call options to hedge a 70,000 dollar payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it acts rationally?

A. £36,750
B. £1,050
C. £37,800
D. £38,850
Answer» D. £38,850
discuss
131.

Conditional currency options are:

A. options that do not require premiums.
B. options where the premiums are canceled if a trigger level is reached.
C. options that allow the buyer to decide what currency the option will be settled in.
D. none of the above
Answer» B. options where the premiums are canceled if a trigger level is reached.
discuss
132.

Which of the following are 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 liqu
Answer» C. Hedgers and speculators are both necessary in order for the market to be liqu
discuss
133.

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. none of the above
Answer» D. none of the above
discuss
134.

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 exercis
Answer» C. The buyer decides if the option will be exercis
discuss
135.

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
Answer» B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
discuss
136.

The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325. The forward rate contains an annualized __________ of ___________%.

A. discount; -18.75
B. premium; 18.75
C. discount; -18.46
D. premium; 18.46
Answer» B. premium; 18.75
discuss
137.

Translation exposure reflects:

A. the exposure of a firm's ongoing international 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.
Answer» C. the exposure of a firm's financial statements to exchange rate fluctuations.
discuss
138.

Diz ltd. is a UK-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 ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer» A. Diz ltd
discuss
139.

Which of the following operations benefits 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
Answer» C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
discuss
140.

Magent ltd. is a UK company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF 200 million and net outflows of DK 500 million. The present exchange rate of the SF is about £0.22 while the present exchange rate of the DK is £0.05. Magent ltd. has not hedged these positions. The SF and DK are highly correlated in their movements against the pound. If the pound weakens, then Magent ltd. will:

A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
B. benefit, because the pound value of its DK position exceeds the pound value of its SF position.
C. be adversely affected, because the pound value of its SF position exceeds the pound value of its DK position.
D. be adversely affected, because the pound value of its DK position exceeds the pound value of its SF position.
Answer» A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
discuss
141.

Subsidiary A of Mega plc 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 £0.30. What is the net inflow or outflow as measured in pounds?

A. £150,000 outflow
B. £150,000 inflow
C. £1,666,000 inflow
D. £1,666,000 outflow
Answer» A. £150,000 outflow
discuss
142.

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
Answer» B. negatively; low
discuss
143.

The maximum one-day loss computed for the value-at-risk (VAR) method, does not depend on:

A. the expected percentage change in the currency for the next day.
B. the standard deviation of the daily percentage changes in the currency over a previous period.
C. the current level of interest rates.
D. the confidence level used.
Answer» C. the current level of interest rates.
discuss
144.

Volusia, plc is a UK-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 pound 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. What is the portfolio standard deviation?

A. 3.00%.
B. 5.44%.
C. 17.98%.
D. none of the above
Answer» B. 5.44%.
discuss
145.

The __________ the percentage of an MNC's business conducted by its foreign subsidiaries, the _________ the percentage of a given financial statement item that is susceptible to translation exposure.

A. greater; smaller
B. smaller; greater
C. greater; greater
D. none of the above
Answer» C. greater; greater
discuss
146.

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% forpounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

A. 5.13%.
B. 2.63%.
C. 4.33%.
D. 5.55%
Answer» A. 5.13%.
discuss
147.

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.
Answer» D. zero.
discuss
148.

An example of cross-hedging is:

A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
B. use the forward market to sell forward whatever currencies you will receive.
C. use the forward market to buy forward whatever currencies you will receive.
D. B and C
Answer» A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
discuss
149.

The real cost of hedging payables with a forward contract equals:

A. the nominal cost of hedging minus the nominal cost of not hedging.
B. the nominal cost of not hedging minus the nominal cost of hedging.
C. the nominal cost of hedging divided by the nominal cost of not hedging.
D. the nominal cost of not hedging divided by the nominal cost of hedging.
Answer» A. the nominal cost of hedging minus the nominal cost of not hedging.
discuss
150.

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. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer» A. sell euros forward.
discuss

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