International Finance Exam 1

What is the management goal of an MNC?

Maximize shareholder wealth by maximizing the value of the MNC.

What are agency costs?

Costs that result from conflicts of interest between managers and shareholders.

Why can MNC agency costs be higher than those of purely domestic firms?

MNCs operate in multiple countries, making it more difficult for shareholders to monitor managers.

What does comparative advantage theory explain?

Countries should specialize in producing products they can produce relatively efficiently and trade with other countries.

What does imperfect markets theory explain?

International business exists because resources are not perfectly transferable between countries.

What does product cycle theory explain?

A product may initially be produced where it is developed, but production may move to other countries as the product becomes more standardized.

What is licensing?

A firm allows a foreign company to use its technology, brand, or other resources in exchange for fees or royalties.

What is a disadvantage of licensing?

It can be difficult to ensure quality control over the foreign company's production process.

What is franchising?

A firm provides a foreign business with its business model, brand, and operating methods in exchange for fees or royalties.

What is a joint venture?

A business arrangement in which two or more firms share ownership and operations.

What is an acquisition of existing operations?

A company purchases an existing foreign company or operation.

What is establishing a new foreign subsidiary?

A company creates a new operation in another country rather than purchasing an existing operation.

What is direct foreign investment (DFI)?

Investment in foreign operations that gives a firm direct control or significant influence over those operations.

What are examples of DFI?

Acquiring an existing foreign operation or establishing a new foreign subsidiary.

Which international business methods are generally the most risky?

Acquisitions of existing operations and establishment of new foreign subsidiaries.

What is international trade?

The buying and selling of goods or services across international borders.

What is a balance of payments statement?

A statement that summarizes a country's economic transactions with other countries.

What are the main components of the balance of payments?

The current account and financial account.

What is the balance of trade?

The difference between a country's exports and imports of goods.

What is a trade deficit?

When a country's imports exceed its exports.

What is a trade surplus?

When a country's exports exceed its imports.

What happens when a country's trade deficit increases?

It places downward pressure on the value of the home currency, other things equal.

What are quotas?

Government limits on the quantity of a product that can be imported.

What happens when a country increases its use of quotas if other governments do not retaliate?

The country's current account balance is expected to increase.

What factors have increased international trade?

Technological improvements, improved transportation and communication, and reductions in trade barriers.

How can government policies affect international trade?

Tariffs, quotas, and trade agreements can affect imports and exports.

How can exchange rates affect international trade?

Exchange rate movements change the relative prices of domestic and foreign goods and influence imports and exports.

What generally happens to exports when a country's currency depreciates?

Exports generally become cheaper to foreign buyers.

What generally happens to imports when a country's currency depreciates?

Imports generally become more expensive for domestic consumers.

What is the foreign exchange market?

The market where currencies are bought and sold.

What is an exchange rate?

The price of one currency expressed in terms of another currency.

What is a bid rate?

The rate at which a bank is willing to buy a currency.

What is an ask rate?

The rate at which a bank is willing to sell a currency.

What is the bid-ask spread?

The difference between the ask rate and the bid rate.

What factors affect the bid-ask spread?

Inventory costs, competition, currency risk, and transaction volume.

What is a direct quotation?

The value of a foreign currency expressed in U.S. dollars.

What is an indirect quotation?

The value of a U.S. dollar expressed in a foreign currency.

When buying foreign currency from a bank, which rate do you use?

The ask rate.

When selling foreign currency to a bank, which rate do you use?

The bid rate.

What is a cross exchange rate?

The value of one non-U.S. currency expressed in another non-U.S. currency.

What is a forward contract?

An obligation to buy or sell a specific amount of currency at a specific exchange rate at a future date.

What is a currency futures contract?

A standardized obligation to buy or sell currency at a specified future date and price.

What is a currency call option?

The right, but not the obligation, to buy a currency at a specified exchange rate.

What is a currency put option?

The right, but not the obligation, to sell a currency at a specified exchange rate.

What is the difference between forwards/futures and options?

Forward and futures contracts create obligations, while options provide rights without obligations.

What is an international money market?

A market used for short-term international financing.

What is an international credit market?

A market used for medium-term debt financing.

What is an international bond market?

A market where bonds are issued and traded internationally.

What is a foreign bond?

A bond issued by a foreign borrower in a country's domestic market and denominated in that country's currency.

What is a Eurobond?

A bond denominated in a currency different from the currency of the country where it is issued.

What is an international stock market?

A market that allows firms and investors to issue and trade stocks internationally.

What is an ADR?

An American Depository Receipt represents shares of a foreign company's stock and trades in the United States.

What determines the price of an ADR?

The foreign stock price, exchange rate, and number of foreign shares represented by the ADR.

What is currency appreciation?

An increase in the value of a currency.

What is currency depreciation?

A decrease in the value of a currency.

What is exchange rate equilibrium?

The exchange rate at which the quantity of a currency demanded equals the quantity supplied.

What happens when demand for a currency increases?

The currency appreciates, or increases in value.

What happens when demand for a currency decreases?

The currency depreciates, or decreases in value.

What happens when supply of a currency increases?

The currency depreciates, or decreases in value.

What happens when supply of a currency decreases?

The currency appreciates, or increases in value.

What factors influence exchange rates?

Relative inflation rates, relative interest rates, relative income levels, government controls, and expectations.

What happens when a country has higher inflation than the U.S.?

Its exports decrease, its imports increase, and there is downward pressure on its currency.

What happens when a country's interest rates increase relative to U.S. interest rates?

Foreign funds flowing into the country increase, funds flowing out decrease, and there is upward pressure on its currency.

What happens when U.S. income decreases while Japan's income stays constant?

There is downward pressure on the Japanese yen.

What happens when Canadian income increases while U.S. income stays constant?

Canadian demand for U.S. goods increases, the supply of Canadian dollars increases, and the Canadian dollar depreciates.

What role do expectations play in exchange rates?

Expectations about future currency movements can change current currency demand and supply.

What is currency speculation?

Attempting to profit from expected changes in exchange rates.

What is the basic currency speculation strategy?

Borrow the currency expected to depreciate and invest in the currency expected to appreciate.

Which theory identifies the non-transferability of resources as a reason for international business?

A. Theory of comparative advantage

B. Imperfect markets theory

C. Product cycle theory

D. None of the above

Imperfect markets theory.

According to the text, what is a disadvantage of licensing?

A. It prevents a firm from importing.

B. It is difficult to ensure quality control of the production process.

C. It prevents a firm from exporting.

D. None of the above

It is difficult to ensure quality control of the production process.

The most risky method(s) by which firms conduct international business is (are):

A. Franchising

B. The acquisitions of existing operations

C. The establishment of new subsidiaries

D. All of the above

E. B and C only

B and C only: acquisitions of existing operations and establishment of new subsidiaries.

An increase in the balance of trade 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

Downward pressure.

An increase in the use of quotas is expected to:

A. Increase the country's current account balance, if other governments do not retaliate.

B. Decrease the country's current account balance, if other governments do not retaliate.

C. Increase the volume of a country's trade with other countries.

D. Increase the volume of a country's imports.

Increase the country's current account balance, if other governments do not retaliate.

Assume that a bank's bid rate on Japanese yen is $0.0041 and its ask rate is $0.0043. Its bid-ask percentage spread is:

A. About 4.99%.

B. About 4.88%.

C. About 4.65%.

D. About 0.43%.

About 4.88%.

Assume that a bank's bid rate on British Pound is $1.33 and its ask rate is $1.38. If you have US dollars, what is the amount of US dollars that you need to purchase £10,000?

A. $13,300

B. $13,800

C. $7,246

D. $7,519

$13,800.

Which of the following factors affect(s) bid-ask spread of a currency?

A. Inventory cost.

B. Competition.

C. Currency risk.

D. Volume.

E. All of the above.

All of the above.

An obligation to purchase a specific amount of currency at a specific exchange rate at a future point in time is called a:

A. Call option

B. Spot contract

C. Put option

D. Forward contract

Forward contract.

Which of the following is a Eurobond?

A. A bond denominated in Canadian dollar, issued by a US firm, and sold to investors in Canada.

B. A bond denominated in euro, issued by a UK firm, and sold to investors in Germany.

C. A bond denominated in US dollars, issued by a UK firm, and sold to investors in US.

D. A bond denominated in US dollars, issued by a US firm, and sold to investors in Canada.

A bond denominated in US dollars, issued by a US firm, and sold to investors in Canada.

If the U.S. and Japan engage in substantial financial flows but little trade, directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, directly influences their exchange rate the most.

A. Interest rate differentials; interest rate differentials

B. Inflation and interest rate differentials; interest rate differentials

C. Income and interest rate differentials; inflation differentials

D. Interest rate differentials; inflation and income differentials

E. Inflation and income differentials; interest rate differentials

Interest rate differentials; inflation and income differentials.

Any event that increases the U.S. demand for euros should result in a(n) in the value of the euro with respect to , other things being equal.

A. Increase; U.S. dollar

B. Increase; nondollar currencies

C. Decrease; nondollar currencies

D. Decrease; U.S. dollar

Increase; U.S. dollar.

If a country experiences high inflation relative to the U.S., its exports to the U.S. should , its imports should , and there is pressure on its currency's equilibrium value.

A. Decrease; increase; upward

B. Decrease; decrease; upward

C. Increase; decrease; downward

D. Decrease; increase; downward

E. Increase; decrease; upward

Exports decrease, imports increase, and there is downward pressure on its currency.

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

The inflow of U.S. funds increases, the outflow decreases, and there is upward pressure on the currency.

The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 20 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.46. The price of this ADR should be:

A. $60.00

B. $87.60

C. $29.20

D. None of the above

$87.60.

The value of euro was $1.15 last week. During last week the euro appreciated by 4%. What is the value of euro today?

A. $1.196

B. $1.190

C. $1.235

D. $1.104

$1.196.

Assume that a bank's bid rate on British Pound is $1.33 and its ask rate is $1.38. If you have British Pounds, what is the amount of British Pounds that you need to purchase $100,000?

A. 133,000.00

B. 138,000.00

C. 72,463.77

D. 75,187.97

£75,187.97.

A Japanese yen is worth $0.0080, and a Fijian dollar is worth $0.5900. What is the value of the yen in Fijian dollars?

A. 73.75

B. 125

C. 1.69

D. 0.014

E. None of the above

Approximately 0.014 Fijian dollars.

Euro's spot rate today is $1.25/€, which is a direct quote. What is the indirect quote of euro today?

A. €1.25/$

B. $1.25/€

C. €0.80/$

D. $0.80/€

€0.80/$.

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

International money; international credit.

is not a factor that causes currency supply and demand schedules to change.

A. Relative inflation rates

B. Relative interest rates

C. Relative income levels

D. Expectations

E. All of the above are factors that cause currency supply and demand schedules to change

All of the above are factors that cause currency supply and demand schedules to change.

Assume that the U.S. experiences a significant decline in income, while Japan's income remains steady. This event should place pressure on the value of the Japanese yen, other things being equal.

A. Upward

B. Downward

C. No

D. Upward and downward (offsetting)

Downward pressure.

A large increase in the income level in Canada along with no growth in the U.S. income level causes a(n) in Canadian demand for U.S. goods, in supply of Canadian dollars for sale, and the Canadian dollar should .

A. Increase, increase, appreciate

B. Increase, increase, depreciate

C. Decrease, decrease, appreciate

D. Decrease, decrease, depreciate

Increase, increase, depreciate.