FINA 4308 – International Finance
Exam Review Questions (Chapters 1, 2, 3, 5, and 6)
Chapter 1
1. 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
2. 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.
3. 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.
4. 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
5. 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.
6. 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
https://www.stuvia.com/
, 7. 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.
C. at 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
8. Privatization refers to the process of
A. having government operate businesses for the betterment of the public sector.
B. government allowing the operation of privately owned business.
C. prohibiting government operated enterprises.
D. a country divesting itself of the ownership and operation of a business venture by turning it over to the free market
system.
9. Deregulation of world financial markets
A. provided a natural environment for financial innovations, like currency futures and options.
B. has promoted competition among market participants.
C. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly
invest in their financial markets.
D. all of the above
10. Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the
A. German mark.
B. French Franc.
C. Japanese Yen.
D. British pound.
11. In David Ricardo's theory of comparative advantage,
A. international trade is a zero-sum game in which one trading partner's gain comes at the expense of another's loss.
B. liberalization of international trade will enhance the welfare of the world's citizens.
C. is a short-run argument, not a long-run argument.
D. has been superseded by the now-orthodox view of mercantilism.
12. The World Trade Organization, WTO,
A. has the power to enforce the rules of international trade.
B. covers agriculture and physical goods, but not services or intellectual property rights.
C. recently expelled China for human rights violations.
D. ruled that NAFTA is to be the model for world trade integration.
13. The theory of comparative advantage
A. claims that economic well-being is enhanced if each country's citizens produce only a single product.
B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for
exchange rate differences in order to standardize the prices charged all countries.
C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative
advantage in producing relative to the citizens of other countries, and then trade production.
D. claims that no country has an absolute advantage over another country in the production of any good or service.
14. A multinational firm can be defined as a firm that
A. invests short-term cash inflows in more than one currency.
B. has sales affiliates in several countries.
C. is incorporated in more than one country.
D. incorporated in one country that has production and sales operations in several other countries.
https://www.stuvia.com/
, 15. MNCs can use their global presence to
A. take advantage of underpriced labor services available in certain developing countries.
B. gain access to special R&D capabilities residing in advanced foreign counties.
C. boost profit margins and create shareholder value.
D. all of the above
16. A corporation that can source its products in one country, sell them in another country, and raise the funds in a third
country
A. is a multinational corporation.
B. is a domestic firm if all of the shareholders are from the same country.
C. enjoys a built-in hedge against exchange rate risk.
D. enjoys a built-in hedge against political risk.
17. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of
producing one additional unit of food instead of textiles.
A. 1 yard of textiles per 1.67 pounds of food
B. 1 pound of food per 1.67 yards of textiles
C. 1 yard of textiles per .6 pounds of food
D. 1 pound of food per .6 yards of textiles
18. Restrictions or impediments to free trade include such things as
A. import quotas.
B. import tariffs.
C. costly transportation.
D. all of the above
19. Comparative advantage
A. is also known as relative efficiency.
B. can lead to trade even in the face of absolute efficiency.
C. exists when one party can produce a good or service at a lower opportunity cost than another party.
D. all of the above
20. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of
textiles or 5 pounds of food per unit of input.
A. Country A is relatively more efficient than Country B in the production of food.
B. Country B is relatively more efficient than Country A in the production of textiles.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
D. Country B has an absolute advantage over Country A in the production of food and textiles.
21. Underlying the theory of comparative advantage are assumptions regarding
A. free trade between nations.
B. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.
C. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively mobile.
D. a) and b)
https://www.stuvia.com/
Exam Review Questions (Chapters 1, 2, 3, 5, and 6)
Chapter 1
1. 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
2. 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.
3. 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.
4. 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
5. 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.
6. 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
https://www.stuvia.com/
, 7. 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.
C. at 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
8. Privatization refers to the process of
A. having government operate businesses for the betterment of the public sector.
B. government allowing the operation of privately owned business.
C. prohibiting government operated enterprises.
D. a country divesting itself of the ownership and operation of a business venture by turning it over to the free market
system.
9. Deregulation of world financial markets
A. provided a natural environment for financial innovations, like currency futures and options.
B. has promoted competition among market participants.
C. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly
invest in their financial markets.
D. all of the above
10. Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the
A. German mark.
B. French Franc.
C. Japanese Yen.
D. British pound.
11. In David Ricardo's theory of comparative advantage,
A. international trade is a zero-sum game in which one trading partner's gain comes at the expense of another's loss.
B. liberalization of international trade will enhance the welfare of the world's citizens.
C. is a short-run argument, not a long-run argument.
D. has been superseded by the now-orthodox view of mercantilism.
12. The World Trade Organization, WTO,
A. has the power to enforce the rules of international trade.
B. covers agriculture and physical goods, but not services or intellectual property rights.
C. recently expelled China for human rights violations.
D. ruled that NAFTA is to be the model for world trade integration.
13. The theory of comparative advantage
A. claims that economic well-being is enhanced if each country's citizens produce only a single product.
B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for
exchange rate differences in order to standardize the prices charged all countries.
C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative
advantage in producing relative to the citizens of other countries, and then trade production.
D. claims that no country has an absolute advantage over another country in the production of any good or service.
14. A multinational firm can be defined as a firm that
A. invests short-term cash inflows in more than one currency.
B. has sales affiliates in several countries.
C. is incorporated in more than one country.
D. incorporated in one country that has production and sales operations in several other countries.
https://www.stuvia.com/
, 15. MNCs can use their global presence to
A. take advantage of underpriced labor services available in certain developing countries.
B. gain access to special R&D capabilities residing in advanced foreign counties.
C. boost profit margins and create shareholder value.
D. all of the above
16. A corporation that can source its products in one country, sell them in another country, and raise the funds in a third
country
A. is a multinational corporation.
B. is a domestic firm if all of the shareholders are from the same country.
C. enjoys a built-in hedge against exchange rate risk.
D. enjoys a built-in hedge against political risk.
17. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of
producing one additional unit of food instead of textiles.
A. 1 yard of textiles per 1.67 pounds of food
B. 1 pound of food per 1.67 yards of textiles
C. 1 yard of textiles per .6 pounds of food
D. 1 pound of food per .6 yards of textiles
18. Restrictions or impediments to free trade include such things as
A. import quotas.
B. import tariffs.
C. costly transportation.
D. all of the above
19. Comparative advantage
A. is also known as relative efficiency.
B. can lead to trade even in the face of absolute efficiency.
C. exists when one party can produce a good or service at a lower opportunity cost than another party.
D. all of the above
20. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of
textiles or 5 pounds of food per unit of input.
A. Country A is relatively more efficient than Country B in the production of food.
B. Country B is relatively more efficient than Country A in the production of textiles.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
D. Country B has an absolute advantage over Country A in the production of food and textiles.
21. Underlying the theory of comparative advantage are assumptions regarding
A. free trade between nations.
B. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.
C. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively mobile.
D. a) and b)
https://www.stuvia.com/
