Solution Manual For International Financial Management
14th Edition by Jeff Madura
6. The goal of a multinational corporation is the maximization of shareholder wealth
a) True
b) False - ANSWER: a) True
7. Locational arbitrage explains why spot exchange rates among banks at different
locations normally will not differ by a significant amount
a) True
b) False - ANSWER: a) True
8. In determining the valuation of foreign projects, an MNC will always use the same
required rate of return as it would for its domestic projects
a) True
b) False - ANSWER: b) False
9. The ______ hedge is not a technique to eliminate transaction exposure discussed
in your text
a) Index
b) Futures
c) Forward
d) Money Market
e) Currency Option - ANSWER: a) Index
10. When the FX market opens in the US each morning, the opening exchange rate
quotations will be based on the:
a) closing prices in the US during the previous day
b) closing prices in Canada during the previous day
c) prevailing prices in locations where the FX markets are already open
d) officially set by central banks before the US market opens - ANSWER: c) Prevailing
prices in locations where FX markets are already open
11. Which of the following is NOT true regarding IRP, PPP, and the IFE?
a) IRP suggests that a currency's spot rate will change according to interest rate
differentials
b) PPP suggests that a currency's spot rate will change according to inflation
differentials
c) the IFE suggests that a currency's spot rate will change according to interest rate
differentials - ANSWER: a) IRP suggests that a currency's spot rate will change
according to interest rate differentials.
12. Japan's annual interest rate has been relatively compared to other countries for
several years, because the supply of funds in its credit market has been very .
a. low; small
,b. high; small
c. low; large
d. high; large - ANSWER: c) low; large
13. The strike price on a currency option is also known as the exercise price.
a) True
b) False - ANSWER: a) True
14. The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements
b. income growth
c. inflation
d. government controls
e. None of these are correct. - ANSWER: c. inflation
15. Many MNCs use selective hedging, in which they consider each type of
transaction separately.
a. True
b. False - ANSWER: a. True
16. In a forward hedge, if the forward rate is an accurate predictor of the future spot
rate, the real cost of hedging payables will be:
a. highly positive
b. highly negative
c. zero
d. None of these are correct. - ANSWER: c. zero
17. Interest rate parity (IRP) states that the foreign currency's forward rate premium
or discount is roughly equal to the interest rate differential between the United
States and the foreign country.
a. True
b. False - ANSWER: a. True
18. The word "covered" in "covered interest arbitrage" refers to the investors
hedging their position to protect against the possibility of default risk.
a. True
b. False - ANSWER: b. False
19. A money market hedge involves taking a money market position to cover a
future payables or receivables position.
a. True
b. False - ANSWER: a. True
20. Triangular arbitrage tends to force a relationship between the interest rates of
two countries and their forward exchange rate premium or discount.
a. True
b. False - ANSWER: b. False
, 21. If U.S. inflation suddenly increased while European inflation stayed the same,
there would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.
c. a decreased U.S. demand for euros and a decreased supply of euros for sale.
d. an increased U.S. demand for euros and a decreased supply of euros for sale. -
ANSWER: d. an increased U.S. demand for euros and a decreased supply of euros for
sale
22. The equilibrium state in which covered interest arbitrage is no longer possible is
called interest rate parity (IRP).
a. True
b. False - ANSWER: a. True
23. According to the text, international trade (exports plus imports combined) as a
percentage of GDP is:
a. higher in the United States than in European countries.
b. lower in the United States than in European countries.
c. higher in the United States than in about half the European countries, and lower in
the United States than in the others.
d. about the same in the United States as in European countries. - ANSWER: b. lower
in the United States than in European countries.
24. The bid/ask spreads quoted on more liquid, heavily traded currencies are larger
than the spreads on less liquid, less traded currencies.
a. True
b. False - ANSWER: b. False
25. Given a home country and a foreign country, purchasing power parity (PPP)
suggests that:
a. the home currency will depreciate if the current home inflation rate exceeds the
current foreign interest rate.
b. the home currency will appreciate if the current home interest rate exceeds the
current foreign interest rate.
c. the home currency will appreciate if the current home inflation rate exceeds the
current foreign inflation rate.
d. the home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate. - ANSWER: d. the home currency will depreciate if the
current home inflation rate exceeds the current foreign inflation rate
26. If the parent's government imposes a tax rate on funds remitted from a foreign
subsidiary, a project is less likely to be feasible from the point of view.
a. high; subsidiary's
b. high; parent's
c. low; parent's
d. high; subsidiary's AND low; parent's
14th Edition by Jeff Madura
6. The goal of a multinational corporation is the maximization of shareholder wealth
a) True
b) False - ANSWER: a) True
7. Locational arbitrage explains why spot exchange rates among banks at different
locations normally will not differ by a significant amount
a) True
b) False - ANSWER: a) True
8. In determining the valuation of foreign projects, an MNC will always use the same
required rate of return as it would for its domestic projects
a) True
b) False - ANSWER: b) False
9. The ______ hedge is not a technique to eliminate transaction exposure discussed
in your text
a) Index
b) Futures
c) Forward
d) Money Market
e) Currency Option - ANSWER: a) Index
10. When the FX market opens in the US each morning, the opening exchange rate
quotations will be based on the:
a) closing prices in the US during the previous day
b) closing prices in Canada during the previous day
c) prevailing prices in locations where the FX markets are already open
d) officially set by central banks before the US market opens - ANSWER: c) Prevailing
prices in locations where FX markets are already open
11. Which of the following is NOT true regarding IRP, PPP, and the IFE?
a) IRP suggests that a currency's spot rate will change according to interest rate
differentials
b) PPP suggests that a currency's spot rate will change according to inflation
differentials
c) the IFE suggests that a currency's spot rate will change according to interest rate
differentials - ANSWER: a) IRP suggests that a currency's spot rate will change
according to interest rate differentials.
12. Japan's annual interest rate has been relatively compared to other countries for
several years, because the supply of funds in its credit market has been very .
a. low; small
,b. high; small
c. low; large
d. high; large - ANSWER: c) low; large
13. The strike price on a currency option is also known as the exercise price.
a) True
b) False - ANSWER: a) True
14. The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements
b. income growth
c. inflation
d. government controls
e. None of these are correct. - ANSWER: c. inflation
15. Many MNCs use selective hedging, in which they consider each type of
transaction separately.
a. True
b. False - ANSWER: a. True
16. In a forward hedge, if the forward rate is an accurate predictor of the future spot
rate, the real cost of hedging payables will be:
a. highly positive
b. highly negative
c. zero
d. None of these are correct. - ANSWER: c. zero
17. Interest rate parity (IRP) states that the foreign currency's forward rate premium
or discount is roughly equal to the interest rate differential between the United
States and the foreign country.
a. True
b. False - ANSWER: a. True
18. The word "covered" in "covered interest arbitrage" refers to the investors
hedging their position to protect against the possibility of default risk.
a. True
b. False - ANSWER: b. False
19. A money market hedge involves taking a money market position to cover a
future payables or receivables position.
a. True
b. False - ANSWER: a. True
20. Triangular arbitrage tends to force a relationship between the interest rates of
two countries and their forward exchange rate premium or discount.
a. True
b. False - ANSWER: b. False
, 21. If U.S. inflation suddenly increased while European inflation stayed the same,
there would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.
c. a decreased U.S. demand for euros and a decreased supply of euros for sale.
d. an increased U.S. demand for euros and a decreased supply of euros for sale. -
ANSWER: d. an increased U.S. demand for euros and a decreased supply of euros for
sale
22. The equilibrium state in which covered interest arbitrage is no longer possible is
called interest rate parity (IRP).
a. True
b. False - ANSWER: a. True
23. According to the text, international trade (exports plus imports combined) as a
percentage of GDP is:
a. higher in the United States than in European countries.
b. lower in the United States than in European countries.
c. higher in the United States than in about half the European countries, and lower in
the United States than in the others.
d. about the same in the United States as in European countries. - ANSWER: b. lower
in the United States than in European countries.
24. The bid/ask spreads quoted on more liquid, heavily traded currencies are larger
than the spreads on less liquid, less traded currencies.
a. True
b. False - ANSWER: b. False
25. Given a home country and a foreign country, purchasing power parity (PPP)
suggests that:
a. the home currency will depreciate if the current home inflation rate exceeds the
current foreign interest rate.
b. the home currency will appreciate if the current home interest rate exceeds the
current foreign interest rate.
c. the home currency will appreciate if the current home inflation rate exceeds the
current foreign inflation rate.
d. the home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate. - ANSWER: d. the home currency will depreciate if the
current home inflation rate exceeds the current foreign inflation rate
26. If the parent's government imposes a tax rate on funds remitted from a foreign
subsidiary, a project is less likely to be feasible from the point of view.
a. high; subsidiary's
b. high; parent's
c. low; parent's
d. high; subsidiary's AND low; parent's
