ch1
Student: ___________________________________________________________________________
The first two columns give the maximum daily amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely specialize in one or other product. The last two
columns give each country's consumption without trade.
1. Is Northern Ireland better off when it trades with Southern Ireland?
True False
2. Now suppose that Southern workers receive a raise to €2 per day. Will trade be possible at the exchange
rate you found in the last question?
True False
3. Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to £2
per day. Will trade be possible at the exchange rate you found in the question before the last question?
True False
4. What major dimension sets apart international finance from domestic finance?
A. Foreign exchange and political risks
B. Market imperfections
C. Expanded opportunity set
D. All of the above
5. An example of a political risk is
A. expropriation of assets.
B. adverse change in tax rules.
C. the opposition party being elected.
D. both answers a) and b) are correct.
6. Production of goods and services has become globalized to a large extent as a result of
A. natural resources being depleted in one country after another.
B. skilled labor being highly mobile.
C. multinational corporations' efforts to source inputs and locate production anywhere where costs are
lower and profits higher.
D. common tastes worldwide for the same goods and services.
7. Recently, financial markets have become highly integrated. This development
A. allows investors to diversify their portfolios internationally.
B. allows minority investors to buy and sell stocks.
C. has increased the cost of capital for firms.
D. answers a) and c) are both correct.
,8. Japan has experienced large trade surpluses. Japanese investors have responded to this by
A. liquidating their positions in stocks to buy dollar denominated bonds.
B. investing heavily in U.S. and other foreign financial markets.
C. lobbying the U.S. government to depreciate its currency.
D. lobbying the Japanese government to allow the yen to appreciate.
9. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00.
One year later the exchange rate is the same, but the Italian government has expropriated your firm's
assets paying only €80,000 in compensation. This is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. none of the above, since $100,000 = €80,000 × $1.25/€1.00
10. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the
stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock
and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of
value is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. weakness in the dollar.
11. Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British
pound depreciates against the U.S. dollar,
A. your firm will be able to charge more in dollar terms while keeping pound prices stable.
B.your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and
your pound prices will rise.
C. to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the
pound price the same.
D. both b) and c) are correct
12. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso
appreciates drastically against the U.S. dollar. This means
A your company's products can be priced out of the Mexican market, as the peso price of American
. imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing lessened price competition from Mexican
imports.
D. both b) and c) are correct
13. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso
depreciates drastically against the U.S. dollar, as it did in December 1994. This means
A your company's products can be priced out of the Mexican market, as the peso price of American
. imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D. both b) and c) are correct
14. Suppose that you are a U.S. producer of a commodity good competing with foreign producers. Your
inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency
depreciates against the currencies of our trading partners,
A. your competitive position is likely improved.
B. your competitive position is likely worsened.
C. your competitive position is unchanged.
,15. Undoubtedly, we are now living in a world where all the major economic functions—consumption,
production, and investment
A. are still inherently local.
B. are still regional in nature.
C. are slowly becoming globalized.
D. are highly globalized.
16. Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to
the free movement of labor is an example of
A. information asymmetry.
B. excessive transactions costs.
C. racial discrimination.
D. a market imperfection.
17. Although the world economy is much more integrated today than was the case 10 or 20 years ago, a
variety of barriers still hamper free movements of people, goods, services, and capital across national
boundaries. These barriers include
A. legal restrictions.
B. excessive transportation costs.
C. information asymmetry.
D. all of the above
18. The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly
to
A. circumvent trade barriers.
B. reduce transportation costs.
C. reduce transactions costs.
D. both a) and b)
19. When individual investors become aware of overseas investment opportunities and are willing to
diversify their portfolios internationally,
A. they trade one market imperfection, information asymmetry, for another, exchange rate risk.
B. they benefit from an expanded opportunity set.
C. they should not bother to read or to understand the prospectus, since it's probably written in a foreign
language.
D. they should invest only in dollars or euros.
20. The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock,
bearer shares and registered shares, and foreigners were allowed to hold only
A. registered shares.
B. bearer shares.
C. voting shares.
D. convertible shares.
21. Deregulated financial markets and heightened competition in financial services provided an environment
for financial innovations that resulted in the introduction of various instruments. Examples of these
innovative instruments include
A. currency futures and options, foreign stock index futures and options.
B. multicurrency bonds.
C. international mutual funds, country funds, exchange traded funds.
D. all of the above
22. Nestlé, a well-known Swiss corporation,
A. has been a paragon of virtue in its opposition to all forms of political risk.
B at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the
. total market value of the firm fell.
Cat one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions,
. there was a major transfer of wealth from foreign shareholders to Swiss shareholders.
D. none of the above
, 23. The goal of shareholder wealth maximization
A. is not appropriate for non-U.S. business firms.
B means that all business decisions and investments that a firm makes are done for the purpose of making
. the owners of the firm better off financially.
C. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
D. is in conflict with the privatization process taking place in third-world countries.
24. As capital markets are becoming more integrated, the goal of shareholder wealth maximization
A. has been altered to include other goals as well.
B. has lost out to other goals, even in the U.S.
C. has been given increasing importance by managers in Europe.
D. has been shown to be a deterrent to raising funds abroad.
25. Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat
A. show that managers might be tempted to pursue their own private interests at the expense of
shareholders.
B. show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders.
C. show that white-collar criminals hardly ever get punished.
D. show that socialism is a better way to go than capitalism.
26. While the corporate governance problem is not confined to the United States,
A it can be a much more serious problem in many other parts of the world, where legal protection of
. shareholders is weak or nonexistent.
B. it has reached its high point in the United States.
C.the U.S. legal system, with lawsuits used only as a last resort, ensured that any conflicts of interest will
soon be a thing of the past.
D. none of the above
27. The owners of a business are the
A. taxpayers.
B. workers.
C. suppliers.
D. shareholders.
28. The massive privatization that is currently taking place in formerly socialist countries, will likely
A. eventually enhance the standard of living to these countries' citizens.
B. depend on private investment.
C. increase the opportunity set facing these countries' citizens.
D. all of the above
29. A firm with concentrated ownership
A. may give rise to conflicts of interest between dominant shareholders and small outside shareholders.
B. may enjoy more accounting transparency than firms with diffuse ownership structures.
C. is a partnership, never a corporation.
D. tends to exist overseas but not in the U.S.
30. The ultimate guardians of shareholder interest in a corporation, are the
A. rank and file workers.
B. senior management.
C. boards of directors.
D. all of the above.
Student: ___________________________________________________________________________
The first two columns give the maximum daily amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely specialize in one or other product. The last two
columns give each country's consumption without trade.
1. Is Northern Ireland better off when it trades with Southern Ireland?
True False
2. Now suppose that Southern workers receive a raise to €2 per day. Will trade be possible at the exchange
rate you found in the last question?
True False
3. Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to £2
per day. Will trade be possible at the exchange rate you found in the question before the last question?
True False
4. What major dimension sets apart international finance from domestic finance?
A. Foreign exchange and political risks
B. Market imperfections
C. Expanded opportunity set
D. All of the above
5. An example of a political risk is
A. expropriation of assets.
B. adverse change in tax rules.
C. the opposition party being elected.
D. both answers a) and b) are correct.
6. Production of goods and services has become globalized to a large extent as a result of
A. natural resources being depleted in one country after another.
B. skilled labor being highly mobile.
C. multinational corporations' efforts to source inputs and locate production anywhere where costs are
lower and profits higher.
D. common tastes worldwide for the same goods and services.
7. Recently, financial markets have become highly integrated. This development
A. allows investors to diversify their portfolios internationally.
B. allows minority investors to buy and sell stocks.
C. has increased the cost of capital for firms.
D. answers a) and c) are both correct.
,8. Japan has experienced large trade surpluses. Japanese investors have responded to this by
A. liquidating their positions in stocks to buy dollar denominated bonds.
B. investing heavily in U.S. and other foreign financial markets.
C. lobbying the U.S. government to depreciate its currency.
D. lobbying the Japanese government to allow the yen to appreciate.
9. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00.
One year later the exchange rate is the same, but the Italian government has expropriated your firm's
assets paying only €80,000 in compensation. This is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. none of the above, since $100,000 = €80,000 × $1.25/€1.00
10. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the
stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock
and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of
value is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. weakness in the dollar.
11. Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British
pound depreciates against the U.S. dollar,
A. your firm will be able to charge more in dollar terms while keeping pound prices stable.
B.your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and
your pound prices will rise.
C. to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the
pound price the same.
D. both b) and c) are correct
12. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso
appreciates drastically against the U.S. dollar. This means
A your company's products can be priced out of the Mexican market, as the peso price of American
. imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing lessened price competition from Mexican
imports.
D. both b) and c) are correct
13. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso
depreciates drastically against the U.S. dollar, as it did in December 1994. This means
A your company's products can be priced out of the Mexican market, as the peso price of American
. imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D. both b) and c) are correct
14. Suppose that you are a U.S. producer of a commodity good competing with foreign producers. Your
inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency
depreciates against the currencies of our trading partners,
A. your competitive position is likely improved.
B. your competitive position is likely worsened.
C. your competitive position is unchanged.
,15. Undoubtedly, we are now living in a world where all the major economic functions—consumption,
production, and investment
A. are still inherently local.
B. are still regional in nature.
C. are slowly becoming globalized.
D. are highly globalized.
16. Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to
the free movement of labor is an example of
A. information asymmetry.
B. excessive transactions costs.
C. racial discrimination.
D. a market imperfection.
17. Although the world economy is much more integrated today than was the case 10 or 20 years ago, a
variety of barriers still hamper free movements of people, goods, services, and capital across national
boundaries. These barriers include
A. legal restrictions.
B. excessive transportation costs.
C. information asymmetry.
D. all of the above
18. The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly
to
A. circumvent trade barriers.
B. reduce transportation costs.
C. reduce transactions costs.
D. both a) and b)
19. When individual investors become aware of overseas investment opportunities and are willing to
diversify their portfolios internationally,
A. they trade one market imperfection, information asymmetry, for another, exchange rate risk.
B. they benefit from an expanded opportunity set.
C. they should not bother to read or to understand the prospectus, since it's probably written in a foreign
language.
D. they should invest only in dollars or euros.
20. The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock,
bearer shares and registered shares, and foreigners were allowed to hold only
A. registered shares.
B. bearer shares.
C. voting shares.
D. convertible shares.
21. Deregulated financial markets and heightened competition in financial services provided an environment
for financial innovations that resulted in the introduction of various instruments. Examples of these
innovative instruments include
A. currency futures and options, foreign stock index futures and options.
B. multicurrency bonds.
C. international mutual funds, country funds, exchange traded funds.
D. all of the above
22. Nestlé, a well-known Swiss corporation,
A. has been a paragon of virtue in its opposition to all forms of political risk.
B at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the
. total market value of the firm fell.
Cat one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions,
. there was a major transfer of wealth from foreign shareholders to Swiss shareholders.
D. none of the above
, 23. The goal of shareholder wealth maximization
A. is not appropriate for non-U.S. business firms.
B means that all business decisions and investments that a firm makes are done for the purpose of making
. the owners of the firm better off financially.
C. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
D. is in conflict with the privatization process taking place in third-world countries.
24. As capital markets are becoming more integrated, the goal of shareholder wealth maximization
A. has been altered to include other goals as well.
B. has lost out to other goals, even in the U.S.
C. has been given increasing importance by managers in Europe.
D. has been shown to be a deterrent to raising funds abroad.
25. Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat
A. show that managers might be tempted to pursue their own private interests at the expense of
shareholders.
B. show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders.
C. show that white-collar criminals hardly ever get punished.
D. show that socialism is a better way to go than capitalism.
26. While the corporate governance problem is not confined to the United States,
A it can be a much more serious problem in many other parts of the world, where legal protection of
. shareholders is weak or nonexistent.
B. it has reached its high point in the United States.
C.the U.S. legal system, with lawsuits used only as a last resort, ensured that any conflicts of interest will
soon be a thing of the past.
D. none of the above
27. The owners of a business are the
A. taxpayers.
B. workers.
C. suppliers.
D. shareholders.
28. The massive privatization that is currently taking place in formerly socialist countries, will likely
A. eventually enhance the standard of living to these countries' citizens.
B. depend on private investment.
C. increase the opportunity set facing these countries' citizens.
D. all of the above
29. A firm with concentrated ownership
A. may give rise to conflicts of interest between dominant shareholders and small outside shareholders.
B. may enjoy more accounting transparency than firms with diffuse ownership structures.
C. is a partnership, never a corporation.
D. tends to exist overseas but not in the U.S.
30. The ultimate guardians of shareholder interest in a corporation, are the
A. rank and file workers.
B. senior management.
C. boards of directors.
D. all of the above.
