International Finance Final Exam/ Actual Exam
Questions with Correct Verified Answers/ Rated A+
1. What are the three major dimensions that set international
finance apart from domestic finance?
A) Foreign exchange risk, political risk, and market imperfections
B) Interest rates, inflation, and economic growth
C) Taxation, regulation, and labor costs
D) Currency risk, sovereign risk, and liquidity risk
Correct Answer: A
Rationale: Three major dimensions set international finance apart
from domestic finance: foreign exchange and political risks,
market imperfections, and an expanded opportunity set . These
factors create unique challenges and opportunities for firms
operating across borders.
1
,2. Foreign exchange risk refers to:
A) The risk that a country will expropriate foreign assets
B) The risk that foreign currency profits may evaporate in dollar
terms due to unanticipated exchange rate movements
C) The risk of default on foreign loans
D) The risk of inflation in foreign markets
Correct Answer: B
Rationale: Foreign exchange risk is the risk that foreign currency
profits may evaporate in dollar terms due to unanticipated
unfavorable exchange rate movements . This risk affects all
cross-border transactions and can have a pervasive influence on
consumption, production, and investment decisions.
3. Which of the following best describes political risk in
international finance?
A) The risk of currency fluctuations
B) The risk that a sovereign country can change the "rules of the
2
,game" in unexpected ways
C) The risk of default by foreign borrowers
D) The risk of market volatility
Correct Answer: B
Rationale: Political risk arises from the fact that a sovereign
country can change the "rules of the game" and affected parties
may not have effective recourse . This ranges from unexpected
changes in tax rules to outright expropriation of assets held by
foreigners.
4. Market imperfections in international finance include all of the
following EXCEPT:
A) Legal restrictions on movements of goods (tariffs)
B) Transaction costs and shipping costs
C) Perfect information symmetry
D) Discriminatory taxation
3
, Correct Answer: C
Rationale: Market imperfections represent various frictions and
impediments preventing markets from functioning perfectly. These
include legal restrictions, excessive transaction and transportation
costs, information asymmetry, and discriminatory taxation .
Perfect information symmetry is the opposite of market
imperfections.
5. The expanded opportunity set available in international
finance allows firms to:
A) Only raise funds domestically
B) Locate production in any country to maximize performance
and raise funds in markets with the lowest cost of capital
C) Avoid all currency risks
D) Eliminate political risk entirely
Correct Answer: B
Rationale: Firms can locate production in any country or region of
4
Questions with Correct Verified Answers/ Rated A+
1. What are the three major dimensions that set international
finance apart from domestic finance?
A) Foreign exchange risk, political risk, and market imperfections
B) Interest rates, inflation, and economic growth
C) Taxation, regulation, and labor costs
D) Currency risk, sovereign risk, and liquidity risk
Correct Answer: A
Rationale: Three major dimensions set international finance apart
from domestic finance: foreign exchange and political risks,
market imperfections, and an expanded opportunity set . These
factors create unique challenges and opportunities for firms
operating across borders.
1
,2. Foreign exchange risk refers to:
A) The risk that a country will expropriate foreign assets
B) The risk that foreign currency profits may evaporate in dollar
terms due to unanticipated exchange rate movements
C) The risk of default on foreign loans
D) The risk of inflation in foreign markets
Correct Answer: B
Rationale: Foreign exchange risk is the risk that foreign currency
profits may evaporate in dollar terms due to unanticipated
unfavorable exchange rate movements . This risk affects all
cross-border transactions and can have a pervasive influence on
consumption, production, and investment decisions.
3. Which of the following best describes political risk in
international finance?
A) The risk of currency fluctuations
B) The risk that a sovereign country can change the "rules of the
2
,game" in unexpected ways
C) The risk of default by foreign borrowers
D) The risk of market volatility
Correct Answer: B
Rationale: Political risk arises from the fact that a sovereign
country can change the "rules of the game" and affected parties
may not have effective recourse . This ranges from unexpected
changes in tax rules to outright expropriation of assets held by
foreigners.
4. Market imperfections in international finance include all of the
following EXCEPT:
A) Legal restrictions on movements of goods (tariffs)
B) Transaction costs and shipping costs
C) Perfect information symmetry
D) Discriminatory taxation
3
, Correct Answer: C
Rationale: Market imperfections represent various frictions and
impediments preventing markets from functioning perfectly. These
include legal restrictions, excessive transaction and transportation
costs, information asymmetry, and discriminatory taxation .
Perfect information symmetry is the opposite of market
imperfections.
5. The expanded opportunity set available in international
finance allows firms to:
A) Only raise funds domestically
B) Locate production in any country to maximize performance
and raise funds in markets with the lowest cost of capital
C) Avoid all currency risks
D) Eliminate political risk entirely
Correct Answer: B
Rationale: Firms can locate production in any country or region of
4
