INTERNATIONAL FINANCIAL MANAGEMENT
ACTUAL TEST PAPER QUESTIONS AND
SOLUTIONS GRADED A+
◉ 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
ACTUAL TEST PAPER QUESTIONS AND
SOLUTIONS GRADED A+
◉ 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
