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Chapter 22

International Finance

True/False

1. Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self-subsistence.

Difficulty: Moderate

Keywords: U.S. and foreign trade

2. Expropriation of plant and equipment without compensation is an example of financial risk from direct foreign investments.

Difficulty: Moderate

Keywords: direct foreign investment, political risk

3. Economic exposure refers to the overall impact of exchange rate changes on the value of the firm.

Difficulty: Easy

Keywords: economic exposure

4. A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other countries.

Difficulty: Easy

Keywords: cross rate

5. The asked rate is also referred to as the buying rate.

Difficulty: Easy

Keywords: asked rate

6. The foreign exchange market is similar in form to the New York Stock Exchange.

Difficulty: Easy

Keywords: foreign exchange market

7. Covered interest arbitrage eliminates exchange rate differentials across the markets of a single currency.

Difficulty: Moderate

Keywords: covered interest arbitrage

8. Arbitrage is the process of buying and selling in one market in order to make a riskless profit.

Difficulty: Easy

Keywords: arbitrage

9. Spot exchange markets have the potential for arbitrage opportunities for a long period of time.

Difficulty: Moderate

Keywords: spot exchange markets

10. The difference between the asked price and the bid price is known as the spread.

Difficulty: Easy

Keywords: asked versus bid price

11. A narrow spread indicates efficiency in the spot exchange market.

Difficulty: Easy

Keywords: narrow spread, spot market

12. Forward contracts are usually quoted for periods greater than one year.

Difficulty: Easy

Keywords: forward contracts

13. Forward rates, like spot rates, are quoted in both direct and indirect form.

Difficulty: Easy

Keywords: forward rates

14. Forward contracts benefit only the customer due to a reduction in uncertainty.

Difficulty: Moderate

Keywords: forward contracts

15. Exchange rate risk arises from the fact that the spot exchange rate on a future date is unknown today.

Difficulty: Easy

Keywords: exchange rate risk

16. There is a minimal exchange risk if the international trade contract is written in terms of the domestic currency.

Difficulty: Moderate

Keywords: international trade contract

17. If a foreign currency is expected to depreciate with respect to the home currency, the holder of a net liability in foreign currency will profit.

Difficulty: Moderate

Keywords: foreign currency depreciation

18. The objective of a prudent financial manager is to eliminate all foreign exchange risk.

Difficulty: Moderate

Keywords: financial managers and exchange rate risk

19. Leading and lagging are financial techniques used to eliminate risk.

Difficulty: Easy

Keywords: leading and lagging techniques

20. The cost of debt used in the international investment decision is the lesser of the parent’s or the subsidiary’s cost of debt.

Difficulty: Moderate

Keywords: cost of debt, international investment

21. Because a large part of a subsidiary’s equity funds comes from the parent, the subsidiary should use the same cost of equity as the parent.

Difficulty: Moderate

Keywords: cost of equity, subsidiaries

22. Millheim Electronics is an American firm operating in India, whose government refuses to allow Millheim to send its earnings out of the country. This is an example of repatriation of profits.

Difficulty: Moderate

Keywords: repatriation of profits

23. A major source of long-term capital overseas is in the eurocurrency market.

Difficulty: Moderate

Keywords: long-term capital sources

24. The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs.

Difficulty: Moderate

Keywords: arbitrage and efficiency of foreign currency markets

25. A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.

Difficulty: Easy

Keywords: direct quote

26. The bid rate (also called the offer rate) is the number of units of home currency paid to a customer in exchange for their foreign currency.

Difficulty: Moderate

Keywords: bid rate

27. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

Difficulty: Moderate

Keywords: foreign currency forward rates

28. With international investing, unlike with domestic investing, if the net present value of a project is negative, the project is not necessarily rejected.

Difficulty: Moderate

Keywords: international investing, net present value

29. Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

Difficulty: Moderate

Keywords: purchasing power parity

30. A multinational company with a large number of receivables runs the risk of transaction exposure.

Difficulty: Moderate

Keywords: multinational company, transaction risk

31. The objective of hedging strategy is to have a zero net asset position in a foreign currency.

Difficulty: Moderate

Keywords: hedging strategy

32. A direct investment is one in which a multinational corporation has control over that investment.

Difficulty: Easy

Keywords: direct investment

33. International portfolio investment involves financial assets with maturities greater than one year.

Difficulty: Easy

Keywords: international portfolio management

34. Capital markets in foreign countries in general are becoming more integrated due to the widespread availability of interest rate and currency swaps.

Difficulty: Moderate

Keywords: capital markets, foreign countries

35. The only type of firm that does not need to be concerned about foreign competition is a purely domestic firm.

Difficulty: Easy

Keywords: foreign competition

36. Since 1973, short-term, day-to-day fluctuations in exchange rates are caused by changes in parity rates.

Difficulty: Moderate

Keywords: short-term exchange rate fluctuations

37. A floating-rate international currency system has been operating since 1973.

Difficulty: Easy

Keywords: floating-rate system

38. Prior to establishing a floating-rate international currency system, all countries set a specific parity rate for their country relative to the United States dollar.

Difficulty: Moderate

Keywords: floating-rate system

39. The foreign exchange market provides a physical entity that transfers the purchasing power from one currency to another.

Difficulty: Moderate

Keywords: foreign exchange markets

40. Foreign exchange transactions carried out in the spot market entails an agreement today to deliver a specific number of units of currency on a future date in return for a specified number of units of another currency.

Difficulty: Moderate

Keywords: foreign exchange markets, spot transaction

41. Transactions carried out in the foreign exchange markets can include direct or indirect exchange rate quotes.

Difficulty: Moderate

Keywords: foreign exchange markets

42. Spot transactions are made immediately in the market place at the market price.

Difficulty: Easy

Keywords: spot transactions

43. Spot exchange markets are efficient due to arbitrage forces.

Difficulty: Moderate

Keywords: spot exchange markets

44. When banks transact in foreign currencies, the direct bid quote is greater than the direct asked quote.

Difficulty: Moderate

Keywords: direct bid and asked quotes

45. The forward rate is the same as the spot rate that will prevail in the future.

Difficulty: Moderate

Keywords: forward rate

46. The major advantage of the forward market is risk reduction.

Difficulty: Easy

Keywords: forward market

47. If the spot price is less than the contracted forward price at expiration of a forward exchange contract, then the customer pays less than the spot price.

Difficulty: Moderate

Keywords: spot price

48. Exchange rate risk always exists when a contract is written in terms of the foreign currency.

Difficulty: Easy

Keywords: exchange rate risk

49. Within the context of working capital management, a multinational corporation with a net liability position faced with an appreciating foreign currency should reduce the liabilities earlier than it would otherwise; that is, adopt a leading strategy to reduce risk.

Difficulty: Moderate

Keywords: working capital management, foreign exchange risk

50. Multinational corporations can have lower cost of capital and more continuous access to external finance compared to a domestic firm.

Difficulty: Moderate

Keywords: multinational corporations, cost of capital

51. The relevant sources of risk for direct foreign investment capital budgeting decisions are the same as those faced when making domestic capital budgeting decisions.

Difficulty: Moderate

Keywords: relevant risk, foreign investment capital budgeting

Multiple Choice

52. A wide bid/ask spread could indicate which of the following?

a. The presence of arbitrageurs

b. Large-volume transactions are taking place

c. Frequent trading of a currency

d. Infrequent trading of a currency

Difficulty: Easy

Keywords: bid/ask spread

53. The rate that a subsidiary or parent of the multinational corporation charges other divisions of the firm for its products is called a(n):

a. forward price.

b. transaction price.

c. transfer price.

d. exchange price.

Difficulty: Moderate

Keywords: transfer price

54. Some complexities of conducting international business include:

a. multiple currencies.

b. differing legal requirements.

1. external control problems.
2. both a and b.

e. all of the above.

Difficulty: Moderate

Keywords: complexities in conducting international business

55. One reason for international investment is to reduce:

a. portfolio risk.

b. price-earnings (P/E) ratios.

c. advantages in a foreign country.

d. beta risk.

Difficulty: Moderate

Keywords: reasons for international investment

56. The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the:

a. purchasing power parity theory.

b. balance of payments quantum theory.

c. interest rate parity theory.

d. arbitrage markets theory.

Difficulty: Moderate

Keywords: interest rate parity theory

57. A spot transaction occurs when one currency is:

a. deposited in a foreign bank.

b. immediately exchanged for another currency.

c. exchanged for another currency at a specified price.

d. traded for another at an agreed-upon future price.

Difficulty: Moderate

Keywords: spot transaction

58. Buying and selling in more than one market to make a riskless profit is called:

a. profit maximization.

b. arbitrage.

c. international trading.

d. cannot be determined from the above information.

Difficulty: Moderate

Keywords: arbitrage

59. Which of the following statements is true?

a. The forward rate is the same as the spot rate that will prevail in the future.

b. Only the forward rate is known.

c. An indirect quote is the exchange rate that indicates the number of units of the home currency required to buy one unit of foreign currency.

d. Both b and c.

Difficulty: Moderate

Keywords: forward rates

60. Forward rates are quoted:

a. in direct form.

b. in indirect form.

c. at a premium or discount.

d. both a and c.

e. all of the above.

Difficulty: Easy

Keywords: forward rates

61. If the quote for a forward exchange contract is greater than the computed price, the forward contract is:

a. overvalued.

b. undervalued.

c. a good buy.

d. at equilibrium.

Difficulty: Moderate

Keywords: forward exchange contracts

62. Exchange rate risk:

a. arises from the fact that the spot exchange rate on a future date is a random variable.

b. applies only to certain types of international businesses.

c. has been phased out due to recent international legislation.

d. both a and b.

Difficulty: Moderate

Keywords: exchange rate risk

63. Exchange rate risk:

a. exists when the contract is written in terms of the foreign currency.

b. exists also in direct foreign investments and foreign portfolio investments.

c. does not exist if the international trade contract is written in terms of the domestic currency.

d. all of the above.

Difficulty: Easy

Keywords: exchange rate risk

64. The purchasing power parity theory states that currency exchange rates tend to vary ____________ with their respective purchasing powers in order to provide _________ purchasing powers.

a. inversely; similar

b. directly; similar

c. inversely; greater

d. directly; greater

Difficulty: Moderate

Keywords: purchasing power parity theory

65. Elimination of all foreign exchange risk:

a. should be the objective of a prudent financial manager.

b. should be analyzed on a cost benefit basis.

c. is possible through diversification.

d. both a and c.

e. all of the above.

Difficulty: Moderate

Keywords: foreign exchange risk

66. Leading and lagging techniques are:

a. helpful in reducing risk.

b. useful when hedging is not available.

c. unsuccessful with multinational corporations.

d. both a and b.

e. all of the above.

Difficulty: Moderate

Keywords: leading and lagging

67. Problems of multinationals include:

a. cash management and positioning of funds.

b. managing receivables.

c. global control.

d. all of the above.

Difficulty: Easy

Keywords: problems of multinationals

68. An important (additional) consideration for a direct foreign investment is:

a. political risk.

b. maximizing the firm’s profits.

c. attaining a high international P/E ratio.

d. all of the above.

Difficulty: Moderate

Keywords: direct foreign investment

69. If the net present value of a direct foreign investment is negative, the multinational firm should:

a. reject any proposals.

b. consider establishing a sales office.

c. consider licensing.

d. both a and c.

Difficulty: Moderate

Keywords: direct foreign investment

70. A multinational corporation:

a. produces a product within its own borders but sells it through independent importers in a foreign market.

b. produces a product within its own borders and sells it through its marketing subsidiaries located in foreign countries.

c. is willing to commit itself to a long-term foreign investment.

d. both b and c.

e. both a and c.

Difficulty: Moderate

Keywords: multinational corporations

71. A multinational corporation exposes the firm to the least amount of political risk with the use of:

a. import/export licenses.

b. licensing agreements.

c. joint ventures with foreign companies.

d. wholly-owned foreign subsidiaries.

Difficulty: Moderate

Keywords: multinational corporations

72. Foreign countries claim that multinational corporations:

a. cause stability in their currencies in foreign exchange markets.

b. exploit local labor with low wages.

c. have no political or cultural loyalty.

1. both b and c.
2. all of the above.

Difficulty: Moderate

Keywords: multinational corporations

73. I. T. Canwait, Inc., a U.S.-based multinational, has just sold cans to a Japanese company, I. C. Spots, Inc. Spots will pay for the order in 60 days. I. T. Canwait is now exposed to which kind of risk?

a. Transaction

b. Translation

c. Operating

d. Financial

Difficulty: Moderate

Keywords: transaction risk

74. _________ risk is generally considered only a paper gain or loss.

a. Transaction

b. Translation

c. Economic

d. Financial

Difficulty: Moderate

Keywords: translation risk

75. Firms generally do not hedge against which type of exposure?

a. Transaction

b. Translation

1. Economic
2. Both b and c

Difficulty: Moderate

Keywords: translation risk

76. Capital markets in foreign countries:

a. offer lower returns than those obtainable in the domestic capital markets.

b. provide international diversification.

c. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps.

d. both a and b.

e. all of the above.

Difficulty: Moderate

Keywords: foreign capital markets

77. A bond sold simultaneously in several different foreign capital markets, but denominated in a currency different from the country in which the bond is issued, is called a(n):

a. world bond.

b. international capital bond.

c. floating bond.

d. Eurobond.

Difficulty: Easy

Keywords: Eurobonds

78. Which of the following statements about exchange rates is true?

a. Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar.

b. Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates.

c. A floating-rate international currency system has been operating since 1973.

d. All of the above.

Difficulty: Moderate

Keywords: exchange rates

79. Transactions carried out in the foreign exchange markets include:

a. spot transactions.

b. forward exchange contracts which allow the exchange of one currency for another today.

c. direct or indirect exchange rate quotes.

d. both a & c.

e. all of the above.

Difficulty: Moderate

Keywords: direct and indirect quotes, spot transactions

Use the following information to answer questions 80-87. Below is an excerpt from Table 22-1, The Globalization of Product and Financial Markets, that appears in your text. Values are foreign exchange rates reported in The Wall Street Journal.

U.S. $ equivalent Currency per U.S. $

Country Mon. Mon.

India (Rupee) 0.03137 31.88

Britain (Pound) 1.5615

30-day Forward 1.5609

90-day Forward 1.5605

180-day Forward 1.5603

Canada (Dollar) 0.7265 1.3765

30-day Forward 0.7256 1.3782

90-day Forward 0.7236 1.3820

180-day Forward 0.7196 1.3896

Sweden (Koruna) 0.18848 5.3055

30-day Forward 0.18829 5.3110

90-day Forward 0.18809 5.3167

180-day Forward 0.18795 5.3205

80. To buy one Indian Rupee you would need:

a. 3.137 cents.

b. 31.88 dollars.

c. 18.848 cents.

d. 5.3055 dollars.

Difficulty: Moderate

Keywords: currency swap

81. The number of pounds you can purchase per U.S. dollar is:

a. 1.5609.

b. 0.6207.

c. 0.6404.

d. 1.5615.

Difficulty: Moderate

Keywords: call option

82. Assume that your firm must pay 10,000 koruna to an Indian rupee firm. In U.S. dollars, the Belgium firm will receive:

a. $31.37.

b. $313.70.

c. $31,370.

d. $3,137.

Difficulty: Moderate

Keywords: put option

83. Assume that your firm must pay $4,000 to a Swedish firm. In koruna, the Swedish firm will receive:

a. 15,422 Swedish koruna.

b. 17,312 French francs.

c. 19,932 French francs.

d. 21,222 French francs.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

84. The Swedish koruna to pound exchange rate is:

a. 8.2845.

b. 8.3016.

c. 8.4156.

d. 8.5037.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

85. The pound to Swedish koruna exchange rate is:

a. 0.1112.

b. 0.1207.

c. 0.1347.

d. 0.1448.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

86. The 90-day forward rate for Canadian dollars is:

a. 0.7265.

b. 0.7256.

c. 0.7236.

d. 0.7196.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

87. The percent-per-annum on the 90-day forward Swedish koruna is a:

a. 0.83% premium.

b. 0.83% discount.

c. 0.26% premium.

d. 0.26% discount.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

88. The current spot exchange rate between the Japanese yen and the U.S. dollar is 125.00 Y/US$. The yen is expected to appreciate by 8% against the dollar over the next year. What do you expect the spot exchange rate between the yen and the dollar to be one year from now?

a. 135.22Y/US$

b. 122.37Y/US$

c. 115.74Y/US$

d. 106.41Y/US$

Difficulty: Moderate

Keywords: spot exchange rate

89. Which of the following statements is true?

a. Interest rate parity indicates that, except for small transactions cost effects, the forward premium or discount should be greater in size to the differences in the national interest rates for securities of the same maturity.

b. Purchasing power parity indicates that, in the long run, exchange rates adjust to reflect international differences in inflation so that the purchasing power of each currency tends to remain the same.

c. The International Fisher Effect indicates that the nominal interest rate should be the same all over the world at all times if the market is efficient.

d. Both b and c.

Difficulty: Moderate

Keywords: purchasing power parity

90. Which of the following is a conceptual method for keeping the foreign currency market in equilibrium?

a. The purchasing power parity mechanisms

b. The balance of trade mechanisms

c. Government intervention through central banks

d. The interest rate parity mechanisms

Difficulty: Moderate

Keywords: interest rate parity mechanisms

91. Measures of foreign exchange exposure include:

a. translation exposure which may be hedged by a change in the asset and liability position in the foreign currency.

b. transactions exposure which results in exchange rate losses and gains that are reflected in the firm’s accounting books, but are unrealized and have little or no impact on taxable income.

c. economic exposure which refers to the overall impact of exchange rate changes on the value of the firm.

d. all of the above.

Difficulty: Moderate

Keywords: measures of foreign exchange exposure

92. The international currency system that presently exists is the _________ exchange rate currency system.

a. parity

b. fixed

c. multinational

d. floating

Difficulty: Moderate

Keywords: floating exchange rate

93. Assume that a firm purchases foreign currency in order to complete the purchase of raw material from an overseas supplier. The currency is purchased today at an exchange rate that is good only for today. This transaction is referred to as a(n) ___________ transaction.

a. forward

b. arbitrage

c. spot

d. hedge

Difficulty: Moderate

Keywords: spot transactions

94. Forward exchange rates:

a. reduce uncertainty about future value of currencies.

b. are always slightly lower than the spot rate.

c. reflect expectations about the future value of currencies.

d. both a and c.

e. all of the above.

Difficulty: Moderate

Keywords: forward exchange rates

95. The exchange rate that represents the number of units of a home currency that is required to purchase one unit of a foreign currency is referred to as a(n) _______ quote.

a. forward

b. direct

c. market

d. indirect

e. arbitrage

Difficulty: Easy

Keywords: direct quote

96. The exchange rate that represents the number of units of a foreign currency that can be purchased with one unit of a home currency is referred to as a(n) _______ quote.

a. forward

b. direct

c. market

d. indirect

e. arbitrage

Difficulty: Easy

Keywords: indirect quote

97. Suppose International Trading Enterprises purchased 100,000 lbs. of Bavarian chocolate for a price of 356,960 German marks. If the current exchange rate is 1.7848 marks to the U.S. dollar, what is the purchase price of the chocolate in dollars?

a. $600,000

b. $500,000

c. $400,000

d. $300,000

e. $200,000

Difficulty: Moderate

Keywords: foreign exchange quotes

98. The following are the prices in the foreign exchange market between the U.S. dollar and a foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What was the discount or premium on three-month forward for the fc?

a. 0.63% premium

b. 0.40% premium

c. 0.63% discount

d. 0.40% discount

Difficulty: Moderate

Keywords: forward discounts

99. Assume that a Toyota sold for 1,476,000 yen in 1985. If the price for this automobile was $8,200 in 1985, and the car still sells for the same amount of yen today, but the current exchange rate is 136 yen per dollar, what is the car selling for today in U.S. dollars?

a. $ 9,367

b. $10,853

c. $11,192

d. $12,062

e. $13,525

Difficulty: Moderate

Keywords: foreign exchange quotes

100. The Japanese yen is selling for 0.0080 US$ and the Euro is selling for 0.9252 US$. The cross rate between the yen and the Euro is:

a. 0.00740 Y/Euro.

b. 0.00865 Y/Euro.

c. 115.650 Y/Euro.

d. 135.135 Y/Euro.

Difficulty: Moderate

Keywords: foreign exchange quotes

101. What keeps foreign exchange quotes in two different countries in line with each other?

a. Cross rates

b. Forward rates

c. Arbitrage

d. Spot rates

e. Parity

Difficulty: Moderate

Keywords: arbitrage

102. Assume that an investor purchased 200,000,000 Japanese yen in New York at an exchange rate of 137 yen to the dollar and simultaneously sold the yen in Tokyo at an exchange rate of 134 Japanese yen to the dollar. Further assume that there was no cost associated with this transaction. What profit did the investor make?

a. $48,541

b. $32,683

c. $21,459

d. $16,327

Difficulty: Moderate

Keywords: foreign exchange quotes, profit on transactions

103. Assume that a manufacturer purchases raw materials from a foreign country. The purchase is made on a letter of credit and payment is not due for 90 days. During the 90–day period, the buyer’s domestic currency could weaken against the foreign currency. Which of the following would protect the buyer from adverse fluctuations in currency exchange rates, or exchange rate risk?

a. Devaluation

b. A forward exchange contract

c. The purchase of a convertible Eurobond

d. The purchase of a repatriation contract

e. Revaluation

Difficulty: Moderate

Keywords: forward exchange contract

104. The primary reason for investing on an international basis is to:

a. increase P/E ratios.

b. minimize your taxable investment income.

c. reduce portfolio risk through diversification.

d. increase arbitrage opportunities.

Difficulty: Moderate

Keywords: international investing

105. Credit policy for multinational firms is generally more risky than for firms operating solely in a domestic market because of:

a. fluctuating exchange rates.

b. uncertainty regarding the credit-worthiness of foreign customers.

c. differences in legal systems.

d. all of the above.

e. none of the above.

Difficulty: Moderate

Keywords: credit policy, multinational companies

106. Assume that a buyer of French wine saw the following quotes: spot rate of 5.9815 francs to the U.S. dollar; 30-day forward rate of 5.9707 francs to the U.S. dollar; 90-day forward rate of 5.9493 francs to the U.S. dollar. What does this information imply?

a. The forward franc is selling at a premium as compared with the spot franc.

b. The dollar is expected to maintain the same value in the near future relative to the franc.

c. The forward franc is selling at a discount as compared with the spot franc.

d. None of the above.

Difficulty: Moderate

Keywords: forward contract rates

107. You are on your way to a beautiful Mexican resort. The current exchange rate is 9.5 pesos to the dollar. When you arrive, you convert 1,000 US$ for how many pesos?

a. You can convert for 9,500 pesos.

b. You can convert for 105.26 pesos.

1. You will lose money when you convert to pesos.
2. Both a and c.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

108. You are leaving Mexico and have 3,000 pesos to change into dollars. The exchange rate is 10.2 pesos to the dollar. How many dollars will you receive?

a. You will receive 30,600 US$.

b. You will receive 294.12 US$.

c. You will lose money converting back into dollars.

d. This is not enough information to find the number of dollars.

Difficulty: Moderate

Keywords: foreign exchange rate quotes

109. Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 6,246,765 francs. Further assume that the quoted exchange rates are as follows: spot rate = 5.9815 francs to the U.S. dollar; 30-day forward rate = 5.9707 francs to the U.S. dollar; and 90-day forward rate = 5.9493 francs to the U.S. dollar. If the actual currency exchange rate at the time payment is due in 90 days is equal to the forward rate of 5.9493 francs to the U.S. dollar, how much would the wine cost the importer in U.S. dollars if payment is made in 90 days?

a. $1,046,237

b. $2,138,429

c. $6,246,765

d. $1,050,000

e. None of the above

Difficulty: Moderate

Keywords: foreign exchange rate quotes

110. Assume that an investor owned 5,000 shares of Chrysler Corporation common stock prior to the purchase of Chrysler by Daimler-Benz of Germany. At the time of the acquisition, the dollar was worth 1.7848 German marks. Further assume that the purchase price was equal to 107.09 marks per share. What was the sales price of Chrysler common stock per share in U.S. dollars?

a. $50

b. $191

c. $107

d. $60

e. None of the above

Difficulty: Moderate

Keywords: foreign exchange rate quotes, common stock

111. Which of the following is expected to occur if an investor decides to expand his investment portfolio by making a direct purchase of a foreign stock?

a. The investor will be exposed to exchange rate fluctuations.

b. The investor would be expected to achieve increased diversification.

c. The investor would be exposed to political risk.

d. All of the above.

e. None of the above.

Difficulty: Moderate

Keywords: direct purchase of foreign stock

Short Answer

112. Briefly discuss the factors that multinational firms consider in arriving at capital structure decisions.

Difficulty: Moderate

Keywords: capital structure decisions, multinational firms