International Finance

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Homework1(Chapter 1 & 2)

1 Into which category of multinational is IBM most likely to fall? a. raw materials seeker b. market seeker c. cost minimizer d. all of the above

2 Which one of the following did NOT accelerate the growth of the global economy in the past decade?

a. the U.S.-Canada-Mexico free-trade pact b. the creation of the European Union c. China’s entrance into the WTO d. The Southeast Asia Currency Crisis

3 The multinational financial system enables companies to a. avoid currency controls b. reduce taxes c. access lower cost financing sources d. all of the above

4 An alternative to the set up of an production facility overseas is to license a local firm to manufacture the company’s products. One disadvantage of this method is

a. the establishment of a competitor with loss of future revenues to the licensing firm

b. the time to market entry c. the degree of financial and legal risks d. the amount of the investment required

5 Which of the following is an example of reverse foreign investment for the U.S.? a. Honda builds a factory in Ohio b. Apple builds a plant in Ireland that exports to the United States c. British Telecom issues new stock in the United States d. American investors buy shares in Sony

6 Which of the following is NOT a failing of the theory of comparative advantage? a. it ignores the role of uncertainty and economies of scale b. it assumes that factors of production are relatively immobile c. it assumes that there are no differentiated products d. it deals with trade only differentiate rather than undifferentiated products

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7. Which of the following theories identifies specialization as the main reason for international business activity? a. product life cycle theory of international trade b. theory of diversification c. doctrine of comparative advantage d. theory of globalization

8. Critics of the multinational corporation would NOT fault its tendency to a. shift production from one location to another in search of lower costs b. avoid taxes c. cause balance of payments difficulties d. engage in environmental protection measures

9. Multinational firms would most likely be a. riskier than purely domestic firms because of the exposures of operating

abroad b. less risky than purely domestic firms because of international

diversification c. less risky than domestic firms if the added risks of operating overseas are

more than offset by the ability to operate in nations whose economic cycles are not perfectly in phase

d. invested in developed countries only and avoid developing economies

10. According to the capital asset pricing model a. only the systematic component of risk affects the required return b. foreign investments whose returns are uncorrelated with the market's

return should have a higher required return than comparable domestic investments

c. total risk of the investment is most relevant for small to medium-sized firms

d. diversification is secondary to risk levels of the investment

11. The internationalization process most likely tends to a. proceed in a preprogrammed series of steps b. begin by licensing foreign producers c. inevitably involve foreign production d. begin by exporting

12. According to the efficient market hypothesis, which one of the following is NOT correct? a. markets place a premium on the future

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b. today’s stock price is the best predictor of tomorrow’s stock price c. stock prices reflect all available information d. today’s stock price incorporates the past history of prices

13. Which one of the following provides strong evidence that internationalization continues to grow in the world economy? a. import restrictions by the Bush Administration on foreign steel b. efforts suggested by politicians to restrict the sourcing of foreign products

by locally headquartered multinationals c. the growing volume of foreign direct investment by U.S. as well as other

multinational companies d. pressure on governments to embargo unfriendly nations

14. For the multinational corporation, which one of the following complements to the integration of world wide operations is MOST critical? a. flexibility b. adaptability c. speed d. economies of scale of distribution

15. According to Shapiro, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that a. Avoids risk at any price b. Manages effectively the political environment of the subsidiary country c. Anticipates every future disturbance related to the supply chain d. Makes decisions that anticipates problems and provides solutions that

enhances the firm’s prospects for growth

16. Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a. 67% b 40% c. 32% d. 28%

17. If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by a. 60% b. 75% c. 125% d. 300%

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18. If a foreigner purchases a U.S. government security a. the supply of dollars rises b. the federal government deficit declines c. the demand for dollars rises d. the U.S. money supply rises

19. The price of foreign goods in terms of domestic goods is called a. the real exchange rate b. the balance of trade c. the trade-weighted exchange rate d. purchasing parity

20. An increase in the real exchange rate will a. raise national income b. lower national income c. make a country less competitive in international trade d. raise the cost of foreign goods

21. A slowdown in U.S. economic growth will a. boost the value of the dollar because inflation fears will be calmed b. boost the value of the dollar because the Federal Reserve will expand the

money supply c. lower the value of the dollar because the U.S. will be a less attractive

place to invest in d. lower the value of the dollar because interest rates will rise

22. The willingness of people to hold money a. increases with the interest rate b. rises with price stability c. rises with national income d. b and c only

23. Sound economic policies will a. raise the value of a nation's currency by boosting the economy b. lower the value of a nation's currency by increasing the precautionary

demand for money c. lower the value of a nation's currency by leading to lower interest rates d. both b and c

24. Large government budget deficits will a. raise the value of a nation's currency by raising domestic interest rates b. raise the value of a nation's currency by stimulating the domestic

economy c. lower the value of a nation's currency by leading to higher inflation

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d. lower the value of a nation's currency by leading to added political risk e. historical experience shows no correlation between government budget

deficits and the value of the nation's currency

25. Which type of money is MOST likely to see its value fluctuate in the foreign exchange market? a. fiat money b. commodity money c. price-indexed money d. pegged-exchange rate

26. An increase in the supply of U.S. dollars by the Federal Reserve will a. raise the value of the dollar because it will stimulate U.S. economic

growth b. raise the value of the dollar because it will lead to higher U.S. interest

rates c. reduce the value of the dollar because of inflation fears in the United

States d. decrease the value of the dollar because it will force other countries to

raise their interest rates

27. Which one of the following is probably the best advice for governments when it comes to exchange rate arrangements? a. The complete replacement of the local currency with the U.S. dollar. b. Currency boards are the next best arrangement after fixed exchange rates. c. There is no substitute for good macroeconomic policy. d. Fixed exchange rates are the most completely sound and credible.

28. Which of the following is an example of foreign exchange market intervention? a. the U.S. government pays Social Security checks to pensioners living in Poland b. IBM sells euros it received in international trade c. the Canadian government pays interest to Saudi Arabian investors d. the Japanese central bank sells yen in the foreign exchange market to prop up the

value of the yen

29. Which one of the following effects would MOST likely be caused by a government artificially holding its currency value down?

a. a massive rise in foreign exchange reserves. b. the value of the nation’s exports rises dramatically c. the outsourcing a the nation’s manufacturing jobs to offshore markets d. a growing trade deficit with foreign economies