IBUS 401: Final Exam UPDATED
ACTUAL QUESTIONS AND CORRECT
ANSWERS
Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the
spot rate 90 days from now, then the real cost of hedging payables will be: - CORRECT ANSWER
zero
Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm? -
CORRECT ANSWER purchase a currency put option in British pounds and sell pounds
forward (A and B)
Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? -
CORRECT ANSWER borrow U.S. dollars, convert them to pounds, and invest them in a
British pound deposit
The real cost of hedging payables with a forward contract equals: - CORRECT ANSWER the
nominal cost of hedging minus the nominal cost of not hedging
Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will
depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: -
CORRECT ANSWER sell euros forward
Your company will receive C$600,000 in 90 days. The 90-day forward rate in Canadian dollar is
$0.80. If you use a forward hedge, you will: - CORRECT ANSWER receive $480,000 in 90
days
The ___________ hedge is not a technique to eliminate transaction exposure discussed in your text. -
CORRECT ANSWER index
If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the
same result as the _____________ hedge. - CORRECT ANSWER forward
, A money market hedge involves taking a money market position to cover a future payables or
receivables position. - CORRECT ANSWER true
Currency futures are very similar to forward contracts, except that they are standardized and are more
appropriate for firms that prefer to hedge in smaller amounts. - CORRECT ANSWER true
To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an
MNC would buy futures. - CORRECT ANSWER false
When the real cost of hedging is positive, this implies that hedging was more favorable than not
hedging. - CORRECT ANSWER false
If interest rate parity exists, then the money market hedge will yield the same result as the options. -
CORRECT ANSWER false
When evaluating international project cash flows, which of the following factors is relevant? -
CORRECT ANSWER all of the above
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: -
CORRECT ANSWER the parent's cost of capital
Other things being equal, a blocked funds restriction is more likely to have significant adverse effect
on a project if the currency of that country is expected to _________ over time, and if the interest rate
in that country is relatively ___________. - CORRECT ANSWER depreciate; low
The discrepancy between the feasibility of a project in a host country for the perspective of the U.S.
parent versus the subsidiary administering the project is likely to be greater for projects in countries
where: - CORRECT ANSWER the currency of the host country is expected to depreciate
consistently.
When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially
financed with retained earnings of the parent and of the subsidiary, then: - CORRECT ANSWER
the foreign project should enhance the value of both the parent and the subsidiary
ACTUAL QUESTIONS AND CORRECT
ANSWERS
Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the
spot rate 90 days from now, then the real cost of hedging payables will be: - CORRECT ANSWER
zero
Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm? -
CORRECT ANSWER purchase a currency put option in British pounds and sell pounds
forward (A and B)
Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? -
CORRECT ANSWER borrow U.S. dollars, convert them to pounds, and invest them in a
British pound deposit
The real cost of hedging payables with a forward contract equals: - CORRECT ANSWER the
nominal cost of hedging minus the nominal cost of not hedging
Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will
depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: -
CORRECT ANSWER sell euros forward
Your company will receive C$600,000 in 90 days. The 90-day forward rate in Canadian dollar is
$0.80. If you use a forward hedge, you will: - CORRECT ANSWER receive $480,000 in 90
days
The ___________ hedge is not a technique to eliminate transaction exposure discussed in your text. -
CORRECT ANSWER index
If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the
same result as the _____________ hedge. - CORRECT ANSWER forward
, A money market hedge involves taking a money market position to cover a future payables or
receivables position. - CORRECT ANSWER true
Currency futures are very similar to forward contracts, except that they are standardized and are more
appropriate for firms that prefer to hedge in smaller amounts. - CORRECT ANSWER true
To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an
MNC would buy futures. - CORRECT ANSWER false
When the real cost of hedging is positive, this implies that hedging was more favorable than not
hedging. - CORRECT ANSWER false
If interest rate parity exists, then the money market hedge will yield the same result as the options. -
CORRECT ANSWER false
When evaluating international project cash flows, which of the following factors is relevant? -
CORRECT ANSWER all of the above
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: -
CORRECT ANSWER the parent's cost of capital
Other things being equal, a blocked funds restriction is more likely to have significant adverse effect
on a project if the currency of that country is expected to _________ over time, and if the interest rate
in that country is relatively ___________. - CORRECT ANSWER depreciate; low
The discrepancy between the feasibility of a project in a host country for the perspective of the U.S.
parent versus the subsidiary administering the project is likely to be greater for projects in countries
where: - CORRECT ANSWER the currency of the host country is expected to depreciate
consistently.
When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially
financed with retained earnings of the parent and of the subsidiary, then: - CORRECT ANSWER
the foreign project should enhance the value of both the parent and the subsidiary
