2. ______________ exists if a firm has assets or liabilities in foreign countries.

a) Translation Exposure

b) Transaction Exposure

c) Economic Exposure

d) Political Exposure

3. _______________ says that the ratio of forward exchange rates to spot exchange rates must also equal the ratio of nominal risk free rates.

a) Fisher Effect

b) Interest Rate Parity

c) Purchasing Power Parity

d) Inflation Parity

4. Which statement is FALSE?

a. The United States has a large current account deficit in its balance of payments

b. A Eurodollar is a US dollar deposited in a bank outside of the US

c. American Depository Receipts represent ownership of stock of foreign companies

d. An Interest Rate Swap is when banks lend to each other

5. In the currency markets, $3 = 2 British pounds and $4 = 5 Swiss francs. Wolverine Cola produces cherry cola in England at a cost of 0.50 British pound per unit. The product is sold in Switzerland for 2.5 Francs. In terms of U.S. dollars, how much profit is Wolverine realizing on each unit sold?

a. $1.75 b. $1.25 c. $0.75 d. $0.25

6. Which statement is NOT CORRECT?

a. Multinational firms can reduce their tax liability through transfer pricing.

b. Countries that adopt a fixed exchange rate give up control of their monetary policy.

c. Expropriation of assets by foreign governments is a risk of foreign operations.

d. US companies must follow all US laws regardless of where their operations are.

Use the following information for questions 7-8

Current Exchange Rates: .9 Canadian Dollars per US$ and US$1.25 per Euro.

Current one-year Inflation Rates: 5% in Canada, 3% in US, and 6% in the Europe

7. The cross rate is __________ Canadian Dollars per Euro.

.51 b. .89 c. 1.125 d. 1.95

8. If interest parity holds true, what is the expected exchange rate between Euros and US$ one year from now?

a) .78 Dollars per Euro

b) .82 Euros per Dollar

c) 1.22 Euros per Dollar

d) 1.29 Dollars per Euro

10. Which of the following statements is NOT CORRECT?

a. Any bond sold outside the country of the borrower is called an international bond.

b. Foreign bonds and Eurobonds are two important types of international bonds.

c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.

d. The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.