1. Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominal interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____. *

a. 3 percentage points below; appreciate by about 3 percent

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

c. 2 percentage points below; appreciate by about 2 percent

d. 2 percentage points above; depreciate by about 2 percent

2. A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option. *

a. call, buy, put, sell

b. call, sell, put, buy

c. put, hold, call, release

d. none of the above

3. When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has *

a. appreciated and German cars sold in the United States become more expensive

b. appreciated and German cars sold in the United States become less expensive.

c. depreciated and American wheat sold in Germany becomes more expensive.

d. depreciated and American wheat sold in Germany becomes less expensive

4. Appleton Co., based in the United States, has costs from orders of foreign material that are lower than 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. be adversely affected by; benefit from

b. benefit from; be adversely affected by

c. benefit from; be unaffected by

d. be adversely affected by; be adversely affected by

5. Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 British pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, and the 180-day forward rate is $2.00. The British interest rate is 5 percent, and the U.S. interest rate is 4 percent over the 180-day period. *

a. $388,210.

b. $400,152

c. $391,210.

d. $396,190

6. Which of the following is NOT TRUE regarding economic exposure? *

a. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.

b. Even purely domestic firms can be affected by economic exposure.

c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.

d. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows

7. Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. 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. 3 percent

b. 4 percent

c. 2 percent

d. 6 percent

8. Assume zero transaction costs. If the 180-day forward rate underestimates the spot rate 180 days from now, then the real cost of hedging payables with a forward contract 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

9. Which of the following international transactions would NOT be counted as a balance of payments (BOP) transaction? *

a. An American tourist purchases cheese in Milwaukee, Wisconsin.

b. The U.S. subsidiary of a British firm pays profits (dividends) back to its parent firm in London.

c. A Canadian lumber baron purchases a U.S. corporate bond through an investment broker in Seattle.

d. All of the above are considered BOP transactions.

10. Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and European investors buy U.S. Treasury Bonds. *

a. Both activities would be considered a direct investment.

b. Both activities would be considered portfolio investments.

c. The auto manufacturer is engaged in portfolio investment, and the European investors are engaged in direct investing.

d. The auto manufacturer is engaged in direct investment, and the European investors are engaged in portfolio investing.

11. In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms produce in foreign countries? *

a. satisfaction of local demand in the foreign country

b. satisfaction of local demand in the domestic markets

c. political safety and the small likelihood of government expropriation of assets

d. All of the above are market-seeking activities.

12. The best means of using direct foreign investment (DFI) to fully benefit from cheap foreign factors of production is probably too *

a. establish a subsidiary in a new market that can sell products produced elsewhere; this allows for increased production and possibly greater production efficiency.

b. establish a subsidiary in a market in which raw materials are cheap and accessible; sell the finished product to countries in which the raw materials are more expensive.

c. establish a subsidiary in a market that has relatively low costs of labor and land; sell the finished product to countries where the cost of production is higher.

d. acquire a competitor that has controlled its local market

13. Which of the following statements regarding currency futures contracts and forward contracts is NOT true? *

a. A futures contract is a standardized amount per currency whereas the forward contract is for any size desired.

b. A futures contract is for a fixed maturity whereas a forward contract is for any maturity you like up to one year.

c. Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.

d. All of the above is true.

14. Campbell Co. is a U.S. firm that has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years because its costs denominated in Jamaican dollars exceed the revenue that it receives in Jamaican dollars. Campbell is reluctant to divest this subsidiary, however. So, the U.S. parent must periodically use some of its funds to pay for the high expenses in Jamaica. Given this information, Campbell would benefit from a(n) ____ of the Jamaican dollar. *

a. Jamaican government pegging (set equal to U.S. dollar

b. Appreciation

c. Depreciation

d. Stabilization

15. Denver Company (a U.S. firm) wants to establish a subsidiary that would produce products and then sell them locally within the country of Barbazo. When it conducts a country risk analysis, all country risk characteristics of Barbazo except ____ should be examined for this purpose. *

a. potential blockage of funds that are remitted by subsidiaries established in Barbazo

b. exchange rate movements of Barbazo's currency against the dollar

c. potential tariffs imposed on products imported by Barbazo's government

d. the attitude of consumers in Barbazo about buying products from a subsidiary that is U.S.-owned

16. Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and European investors buy U.S. Treasury Bonds. *

a. Both activities would be considered direct investments.

b. Both activities would be considered portfolio investments.

c. The auto manufacturer is engaged in portfolio investment and the European investors are engaged in direct investing.

d. The auto manufacturer is engaged in direct investment and the European investors are engaged in portfolio investing.

17.According to the interest parity condition, if the domestic interest rate is ________ the foreign interest rate, then ________. *

a. above; there is expected appreciation of the foreign currency

b. above; there is expected depreciation of the foreign currency

c. below; there is expected appreciation of the foreign currency

d. below; the interest parity condition is violated

18. Pro Corp., a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the United States is expected to be 3 percent during the next year, while inflation in Thailand is expected to be 10 percent. Under this scenario, Pro Corp. would forecast the value of the baht at the end of the year to be: *

a. $0.023.

b. $0.021.

c. $0.020.

d. None of the above

19. The countries that use the euro as their currency have: *

a. agreed to use a single currency (exchange rate stability), allow the free movement of capital in and out of their economies (financial integration), but give up individual control of their own money supply (monetary independence)

b. gained control over their own money supply (monetary independence), allowed the free movement of capital in and out of their economies (financial integration), but give up exchange rate stability.

c. agreed to use a single currency (exchange rate stability), allow individual control of their own money supply (monetary independence), but give up the free movement of capital in and out of their economies (financial integration).

d. none of the above

20. Given the information in the table below *

a. neither country has a comparative advantage in cloth.

b. Home has a comparative advantage in cloth.

c. Foreign has a comparative advantage in cloth.

d. Home has a comparative advantage in both cloth and widgets.

Unit Labor Requirements Cloth Widgets Home 10 20 Foreign 60 30