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Exam 17: Multinational Financial Management

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Question 21

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Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?

A) −$240,000
B) −$43,200
C) $0
D) $43,200
E) $47,473

F) A) and C)
G) C) and E)

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Question 22

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Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?

A) 1 British pound equals 3.2400 Swiss francs
B) 1 British pound equals 2.6244 Swiss francs
C) 1 British pound equals 1.8588 Swiss francs
D) 1 British pound equals 1.0000 Swiss francs
E) 1 British pound equals 0.3810 Swiss francs

F) B) and D)
G) A) and E)

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Question 23

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Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S. money market instruments.

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian dollar?

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.

Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?

When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?

Which of the following is NOT a reason why companies move into international operations?

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.