Multiple-Choice Quiz

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Chapter 24: International Financial Management

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1. Which of the following is a legitimate reason for international investment?

Dividends from a foreign subsidiary are tax exempt in the United States.

Most governments do not tax foreign corporations.

There are possible benefits from international diversification.

International investments have less political risk than domestic investments.

2. Interest-rate parity refers to the concept that, where market imperfections are few,

the same goods must sell for the same price across countries.

interest rates across countries will eventually be the same.

there is an offsetting relationship between interest rate differentials and differentials
in the forward spot exchange market.

there is an offsetting relationship provided by costs and revenues in similar
market environments.

3. The forward market is especially well-suited to offer hedging protection against

translation risk exposure.

transactions risk exposure.

political risk exposure.

taxation.

4. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market. This implies that most likely

this currency has low exchange-rate risk.

this currency is gaining strength in relation to the dollar.

interest rates are higher in Japan than in the United States.

interest rates are declining in Japan.

5. Following FASB Statement No. 52, gains or losses from currency translation are shown:

on the income statement as currency gains (or losses).

on the balance sheet as an adjustment to owners' equity.

on the balance sheet as an adjustment to cash.

nowhere because gains or losses from currency changes need not be shown..

6. All of the following are hedges against exchange-rate risk EXCEPT

balancing monetary assets and liabilities.

use of spot market.

foreign-currency swaps.

adjustment of funds commitments between countries.

7. A multinational can centralize cash management and attempt to reduce exchange rate risk exposure through the use of

a reinvoicing center.

a bill of lading.

a time draft.

countertrade.

8. Forfaiting most closely resembles

export factoring.

countertrade.

netting.

reinvoicing.

9. The euro is the name for

a currency deposited outside its country of origin.

a bond sold internationally outside of the country in whose currency
the bond is denominated.

a common European currency.

a type of sandwich.

10. Assume that a Big Mac hamburger is selling for Ł1.99 in the United Kingdom, the same hamburger is selling for $2.71 in the United States, and the actual exchange rate (to buy $1.00 with British pounds) is 0.63. According to , the British pound is the US dollar.

purchasing-power parity; undervalued

interest-rate parity; undervalued

purchasing-power parity; overvalued

interest-rate parity; overvalued

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