Question 1. 1. (TCO A) Which is not true with respect to spot market liquidity? (Points : 5)

The more willing buyers and sellers there are, the more liquid a market is.

If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.

The spot markets for heavily traded currencies, such as the Japanese yen, are very liquid.

Question 2. 2. (TCO A) If a U.S. firm desires to avoid the risk from exchange rate fluctuations and it will need C$200,000 in 90 days to make payment on imports from Canada, it could (Points : 5)

obtain a 90-day forward purchase contract on Canadian dollars.

obtain a 90-day forward sale contract on Canadian dollars.

purchase Canadian dollars 90 days from now at the spot rate.

sell Canadian dollars 90 days from now at the spot rate.

Question 3. 3. (TCO B) Assume that Swiss investors are benefiting from CIA due to a high U.S. interest rate. Which force results from the act of this CIA? (Points : 5)

Upward pressure on the Swiss franc's spot rate

Upward pressure on the U.S. interest rate

Downward pressure on the Swiss interest rate

Upward pressure on the Swiss franc's forward rate

Question 4. 4. (TCO C) To force the value of the British pound to depreciate against the dollar, the Federal Reserve should (Points : 5)

sell dollars for pounds in the foreign exchange market, and the Bank of England should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market, and the Bank of England should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market, and the Bank of England should sell pounds for dollars in the foreign exchange market.

sell dollars for pounds in the foreign exchange market, and the Bank of England should sell pounds for dollars in the foreign exchange market.

Question 5. 5. (TCO D) Assume that a currency's spot and future prices are the same and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would _____ the currency's spot rate and _____ the currency's futures price. (Points : 5)

put upward pressure on; put upward pressure on

put downward pressure on; put upward pressure on

put upward pressure on; put downward pressure on

put downward pressure on; put downward pressure on

Question 6. 6. (TCO H) If the foreign currency _____ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes _____ the change in the exchange rate. (Points : 5)

depreciates; in the same proportion as

appreciates; by a lesser percentage than

appreciates; in the same proportion as

appreciates; by a greater percentage than

Question 7. 7. (TCO E) Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by (Points : 5)

the cost of borrowing funds in the U.K.

the parent's cost of capital.

the cost of borrowing funds in the United States.

the cost of borrowing funds in both the U.K. and the United States.

Question 8. 8. (TCO F) An MNC may be more exposed to agency problems if most of its shares are held by (Points : 5)

a few mutual funds.

a few pension funds.

a widely dispersed set of individual investors.

All of the above would prevent agency problems.

Question 9. 9. (TCO I) Under a letter of credit arrangement, the bank issuing the letter of credit is known as the _____ bank, the correspondent bank in the beneficiary's country to which the issuing bank sends the letter of credit is known as the _____ bank, and the bank that agrees to examine documents under the letter of credit and pay the beneficiary is called the _____ bank. (Points : 5)

issuing; negotiating; advising

advising; issuing; negotiating

negotiating; issuing; advising

issuing; advising; negotiating

Question 10. 10. (TCO G) With regard to hedging translation exposure, translation losses _____, and gains on forward contracts used to hedge translation exposure _____. (Points : 5)

are not tax deductible; are taxed

are tax deductible; are taxed

are not tax deductible; are not taxed

are tax deductible; are not taxed

Page 2

Question 1. 1. (TCO D) A firm wants to use an option to hedge NZ$12.5 million in receivables from New Zealand firms. The premium is $0.03. The exercise price is $0.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?. (Points : 12)

Question 2. 2. (TCO B) Assume the following information.

You have $300,000 to invest.

The spot bid rate for the euro is $1.08.

The spot ask quote for the euro is $1.10.

The 180-day forward rate (bid) of the euro is $1.08.

The 180-day forward rate (ask) of the euro is $1.10.

The 180-day interest rate in the U.S. is 6%.

The 180-day interest rate in Europe is 8%.

If you conduct CIA, what amount will you have after 180 days?

Show your work. (Points : 12)

Question 3. 3. (TCO D) You purchase a put option on Swiss francs for a premium of $0.02, with an exercise price of $0.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $0.58, what is your net profit per unit? (Points : 12)

Question 4. 4. (TCO D) What are major differences between currency futures and forward contracts? List at least five of them. (Points : 14)

Page 3

Question 1. 1. (TCO A) Answer the following questions regarding international financial markets.

Recently, Walmart established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain products purchased locally as well as imports. As Walmart generates earnings beyond what it needs in Shanzen, it may remit those earnings back to the United States. Walmart is likely to build additional outlets in Shanzen or in other Chinese cities in the future.

(a) How would the Walmart outlets in China use the spot market in foreign exchange?

(b) How might Walmart utilize the international money market when it is establishing other Walmart stores in Asia? (Points : 25)

Question 2. 2. (TCO C) Discuss the following scenario below and how it would affect Asian exchange rates during a crisis.

A decline in Asian interest rates and capital flows and investment in the country (Points : 25)

Question 3. 3. (TCO F) What is DFI? Provide some examples of DFI methods that MNCs utilize. (Points : 25)

Question 4. 4. (TCO D) List the factors that affect currency call option premiums, and briefly explain the relationship that exists for each. (Points : 25)

Question 5. 5. (TCO B) Assume that the annual U.S. interest rate is currently 8% and Germany's annual interest rate is currently 9%. The euro's 1-year forward rate currently exhibits a discount of 2%.

(a) Does IRP exist?

(b) Can a U.S. firm benefit from investing funds in Germany using CIA?

(c) Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through CIA? (Points : 25)

Question 6. 6. (TCO F) Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson's best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain why. (Points : 25)

Question 7. 7. (TCO G) Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. What will happen if the euro strengthens? What happens if the euro weakens? Provide a brief explanation as to why. (Points : 25)

Question 8. 8. (TCO E) List and describe some common risks of DFI and how these risks may be reduced. (Points : 25)